4-hour timeframe
Technical details:
Higher linear regression channel: direction - upward.
Lower linear regression channel: direction - upward.
Moving average (20; smoothed) - sideways.
CCI: -66.5073
At the beginning of the new trading week, the British currency continues to trade in a "high-volatility swing" mode. On Monday, the pound/dollar pair went down 300 points, and then immediately up the same amount. On Tuesday, the volatility was not so strong, so the pair was limited to "only" 160 points down. Thus, the technical picture at this time is very eloquent. The pound continues to bounce from side to side, as the fundamental background is now very strong. At the same time, it is impossible to say unequivocally that the markets are working out this background. Most likely, it just causes panic and creates uncertainty, which traders and investors dislike so much. Both on Monday and Tuesday, the pound was still tipped to fall. But why? What are the true reasons for trying to start a downward trend at the beginning of this week, if the fundamental background has long been saying that it is time for the pound to go south?
We will try to understand all the reasons and draw conclusions. The first possible reason lies on the surface. This, of course, is Brexit, which is only 9 days away. According to the latest information, the groups of Michel Barnier and David Frost are continuing the negotiation process, however, the European Parliament has already said that this year it will not vote for the deal, even if it is still agreed before December 31. The problem is that no one except the negotiating teams and possibly Ursula von der Leyen and Boris Johnson knows exactly what terms Barnier and Frost negotiated. Simply put, neither MEPs nor British parliamentarians know all the details and agreements that Barnier and Frost have already reached and that they are currently discussing. That is, it is not enough that the deal still "does not smell", no matter what anyone says since even those people who will have to ratify the agreement on both sides are not aware of all the terms of the agreement. Likely, the European Parliament or the British Parliament will simply block the trade agreement if Barnier and Frost manage to do the impossible and make it to December 31. We remind you that the entire volume of the document, which will display all the points of the agreement, will probably take several hundred pages. Thus, it will only take a few days to study the document in detail. Therefore, it is necessary to appoint an emergency meeting of both parliaments, which by that time should already be either on Christmas or New Year holidays. In general, even two months ago, we said that there is almost no chance of agreeing, and now even more so. Perhaps the markets have finally taken this moment into account and started selling off the pound because of it.
The second possible reason is a new strain of "coronavirus", because of which many European countries have closed communication with the Foggy Albion, as well as within the UK itself, quarantine measures have been tightened. After all, the meaning for the economy is not in the "coronavirus" itself, but in what consequences it causes. Unfortunately, any epidemic causes a decline in the economy. Therefore, any tightening of quarantine measures is a potential contraction of the economy. Now let's calculate, the British economy, like the European one, will lose a few percent in the fourth quarter. But this was only when taking into account the second "lockdown". If Britain has already tightened the measures, and may even tighten them even more, then this can be considered the third "lockdown" or something close to it. So the British economy may shrink even more. How can the pound grow if the British economy continues to shrink? In recent days, new anti-records have been observed in the UK in terms of the number of "coronavirus" diseases, so everything is going to ensure that the "hard" quarantine will continue for some time.
The third possible reason is technical and speculative. As we have already mentioned in the article on the euro/dollar, on the eve of the New Year and Christmas, many market participants may try to lock in profits and go on vacation. Thus, the pound may still decline because of this. And we have already talked about the technical grounds many times. As well as about the fundamental ones, which are expressed by the fact that in 2021 the British economy is waiting for new shocks. And in addition to economic problems, the UK may also face geopolitical ones, as Scotland still insists on holding a new independence referendum and passionately wants to remain in the European Union, but outside the United Kingdom. In general, despite all the assurances of Boris Johnson about a bright future, so far we do not see any grounds for such a statement.
Along with all of the above, it should also be noted that the pound sterling, although it has become cheaper in recent days by 400 points, has quickly regained most of these losses. Therefore, now a downward trend has formally formed, but in fact, it can end at any time and does not increase the likelihood of a further fall in the British currency quotes. Thus, the technical picture remains quite complex, and it is extremely difficult to predict the movement of the pair for more than one day. It is best to trade the pair now using the smallest timeframes. Or don't trade at all. It is very difficult to understand what factors traders are now paying attention to.
From a technical point of view, the pound/dollar pair corrected to the moving average line and rebounded from it, so the downward movement can resume with the target of 1.3184, to which the quotes have already fallen twice. In practice, unfortunately, the probability of falling is the same as the probability of resuming an upward trend.
The average volatility of the GBP/USD pair is currently 169 points per day. For the pound/dollar pair, this value is "high". On Wednesday, December 23, thus, we expect movement inside the channel, limited by the levels of 1.3230 and 1.3568. The reversal of the Heiken Ashi indicator to the top signals a new round of upward movement.
Nearest support levels:
S1 – 1.3367
S2 – 1.3306
S3 – 1.3245
Nearest resistance levels:
R1 – 1.3428
R2 – 1.3489
R3 – 1.3550
Trading recommendations:
The GBP/USD pair on the 4-hour timeframe is now in a new round of downward movement. Thus, today it is recommended to sell the pair with targets of 1.3306 and 1.3245 if the price remains below the moving average, and the Heiken Ashi remains directed down. It is recommended to trade the pair again for an increase with targets of 1.3489 and 1.3550 if the price is fixed above the moving average line. In general, now the "swing" has begun again. Not a good time to trade.
