The GBP/USD currency pair traded weakly on Monday, but it was clearly positioned below the moving average, suggesting that the downward trend is prevailing. The nearly year-long ascent of the pound sterling might have ended. Of course, the market can always find or invent new reasons to sell the dollar and buy British currency at any moment. In this case, trying to analyze fundamental and macroeconomic factors is pointless. We've often stated that the market can trade partially in line with fundamentals, as many large players make transactions for personal reasons, not necessarily for profit. Therefore, regardless of the fundamental backdrop, the pair can move in any direction.
If we still consider the fundamentals, the current picture is clear. The pound rose for 11 months, and there wasn't always a valid reason for this ascent. Recall that the Bank of England continues to tighten its policy, but so does the Fed, which has been the case for the past 11 months. Based solely on this factor, a question arises: what justified the pair's rise of almost 3000 points? The British economy continues to stagnate while the American economy grows. Inflation in the US continues to decrease towards its target level, while in the UK, it remains high. The Bank of England might raise rates even up to 7%, but who currently believes (and subsequently factors into the prices) this scenario?
On the 24-hour timeframe, the pair remains positioned below the critical line. However, the Senkou Span B line needs to be surpassed to ascertain the beginning of a global downward trend. As of now, there's no sign of that happening.
The Fed is not backing down.
The "silence mode" has ended, and this week speeches by representatives of the Federal Reserve's monetary committee have begun. It's worth noting that many (almost all) speeches don't bring important or new information to the market. All these events are of interest to market participants only as background. For instance, if 5-6 heads of the Federal Reserve branches state that they aren't ready to vote further for tightening monetary policy, the likelihood of a rate hike by the end of the year would decrease, potentially putting pressure on the dollar. However, every speech from a senior official can't influence the dollar's movement.
On Monday, Michelle Bowman stated that the regulator is still prepared to raise the key rate if inflation starts to rise again or drops too slowly. She noted that inflation remains above the target level, meaning the Federal Reserve cannot remain passive. Ms. Bowman also observed that the rates might remain at peak levels for as long as necessary until there's convincing evidence that inflation is nearing the target rate. It should be noted that many Federal Reserve members anticipate another rate hike, leading to a mark of 5.75%. The Fed maintains its "hawkish" stance, which should support the dollar in the medium term (at least for several upcoming months).
For now, the Bank of England maintains its "hawkish" stance, but the market has already factored in its rate hikes with a good margin. We consider it prudent to return to a scenario with a long-term upward trend only after the price consolidates above the critical line in the 24-hour timeframe.
The average volatility of the GBP/USD pair over the last five trading days stands at 107 points. For the pound/dollar pair, this value is considered "average." Thus, on Tuesday, August 8, we expect movements within the range bounded by levels 1.2650 and 1.2864. A reversal of the Heiken Ashi indicator back downward would signal the resumption of a downward movement.
The nearest support levels:
S1 – 1.2756
S2 – 1.2695
S3 – 1.2634
The nearest resistance levels:
R1 – 1.2817
R2 – 1.2878
R3 – 1.2939
Trading recommendations:
The GBP/USD pair in the 4-hour timeframe continues to be positioned below the moving average. At the moment, short positions targeting 1.2695 and 1.2650 remain relevant. These should be opened in case of a Heiken Ashi indicator reversal downward or if the price bounces off the moving average. Long positions can be considered if the price consolidates above the moving average, with targets at 1.2817 and 1.2864.
Explanations for illustrations:
Linear regression channels - help to determine the current trend. If both are pointed in the same direction, the trend is strong.
Moving average line (settings 20.0, smoothed) - determines the short-term tendency and the direction in which trading should be conducted.
Murrey levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator - its entry into the oversold area (below -250) or the overbought area (above +250) means that a trend reversal in the opposite direction is approaching.
