Long-term perspective.
The GBP/USD currency pair has fallen by another 250 points during the current week. In total, over the past three weeks, the pound has fallen by 7.5 cents against the US currency. At the same time, there were no specific, new reasons for such a powerful fall. Yes, the fundamental, macroeconomic, and geopolitical backgrounds remain in favor of the dollar. But they are not as strong as before to provoke such collapses. The Bank of England also raises the key rate, as does the Fed. Therefore, this factor cannot be written down unambiguously in favor of the dollar. The geopolitical conflict in Eastern Europe promises to flare up with renewed vigor but has not yet flared up. The energy and food crises affect the UK much less than the same EU. And the macroeconomics in the UK is not much worse than in the States, wherein the first-quarter GDP showed a drop of 1.4%. Thus, the advantage of the dollar remains, and it is still powerful. However, it is no longer as unambiguous as before. Moreover, the pound has fallen almost without a single correction since the beginning of the military conflict between Ukraine and Russia by 1,250 points. Without a single correction. Therefore, we believe that the British currency should have started moving up a long time ago. What happened this week is quite difficult to describe logically. The Bank of England raised the rate to 1%, the Fed raised the rate to 1%, and the pound collapsed by 300 points on Thursday. Friday's Nonfarm, which is generally considered the most important report, no longer even interested traders, although formally the actual value exceeded the forecast, so the dollar could rise in price again. Each new decline updates the pair's 2-year lows and continues to move towards its absolute lows, which are near the 14th level. The situation at the beginning of 2022 has changed dramatically. If before February 24 we thought that the pound was correcting against the upward trend of 2020, now it seems that we should admit that we are observing a downward trend, the "bottom" of which may be very low.
COT analysis.
The latest COT report on the British pound has witnessed a new strengthening of the "bearish" mood among professional traders. During the week, the Non-commercial group closed 6,900 buy contracts and 2,700 sell contracts. Thus, the net position of non-commercial traders decreased by another 4 thousand. The net position has been falling for 2.5 months, which is perfectly visualized by the green line of the first indicator in the illustration above. The Non-commercial group has already opened a total of 107 thousand sales contracts and only 33.5 thousand purchase contracts. Thus, the difference between these numbers is threefold. This means that the mood of professional traders is now "pronounced bearish" and this is another factor that speaks in favor of continuing the fall of the British currency. Note that in the case of the pound sterling, the COT reports data very accurately reflect what is happening in the market. The mood of traders is "strong bearish", and the pound is falling against the US dollar very much too. We do not see any reason to assume the completion of the downward trend now. COT reports, "foundation", geopolitics, "macroeconomics", and "technology", all speak in favor of the fall of the pound and the growth of the dollar. Of course, the fall of the pound/dollar pair cannot last forever, there should be at least upward corrections, but so far, there is not a single signal about the beginning of such.
Analysis of fundamental events.
A meeting of the Bank of England was held in the UK this week. This is an important event, and its results were also "hawkish". But, like in the previous three meetings, when the BA also raised the key rate, this "hawkishness" did not provide any support to the pound. And on Friday, when strong labor market data came out in the States, neutral on unemployment and not bad on wages, the dollar could have grown even stronger, but with difficulty refrained from doing so. We do not see any point in considering all other reports and events of the week, since the market reacted exclusively to the three most important events. And even then, it is quite difficult to say that it reacted reasonably. The Fed meeting caused a backlash. The BA meeting caused a backlash. The NonFarm Payrolls report remained without reaction. And as a result, the US dollar is still growing again. That's the kind of week it turned out to be, volatile, but not particularly logical.
Trading plan for the week of May 9-13:
1) The pound/dollar pair easily and simply overcame the Fibonacci level of 1.2494 (61.8%). Now the fall of the British currency continues with a target of the Fibonacci of 1.2080 (76.4%). There is no sign of the beginning of an upward correction, so we still recommend selling the pair. Most factors no longer give such a strong advantage to the dollar as before, but the mood of traders remains "strongly bearish", so the fall of the pound may continue for some time.
2) The prospects for the British currency remain rather vague and so far there is no reason to buy the pound/dollar pair. We believe that it is simply impractical to buy a pair on such a strong downward trend, no matter how attractive the current levels look. We believe that it will be possible to open long positions only above the Ichimoku cloud, and such price consolidation is unlikely to happen in the near future.
Explanations of the illustrations:
Price levels of support and resistance (resistance /support), Fibonacci levels - target levels when opening purchases or sales. Take Profit levels can be placed near them.
Ichimoku indicators (standard settings), Bollinger Bands (standard settings), MACD (5, 34, 5).
Indicator 1 on the COT charts - the net position size of each category of traders.
Indicator 2 on the COT charts - the net position size for the "Non-commercial" group.
