4-hour timeframe
Technical details:
Higher linear regression channel: direction - upward.
Lower linear regression channel: direction - upward.
Moving average (20; smoothed) - upward.
CCI: 119.8928
The British pound sterling paired with the US dollar on January 12 grew "by leaps and bounds". Thus, even without going into the details of the reasons for what happened, we can conclude that the "highly volatile swing" for the pair remains. The pound rose by more than 150 points during the day. Thus, the downward trend, which was formed earlier, is again called into question. More precisely, it was canceled, as the pair's quotes were fixed above the moving average line. Therefore, at the moment, the trend is again upward. However, in the "swing" mode, all trends are conventions, since the essence of the "swing" is precisely the absence of a clear trend. The price "dances" from side to side, corrections are deep, all movements are relatively sharp and fast. However, for example, there may still be a trend on the hourly timeframe, so in the "swing" conditions on the 4-hour timeframe, you can switch to lower charts for trading.
In principle, the pound rose yesterday only because of one event. For us, this is even a big surprise, since in recent months all currency pairs have reacted very poorly to the fundamental background and macroeconomic statistics. However, yesterday was an exception. The head of the Bank of England, Andrew Bailey, said that there are a lot of difficulties and problems with negative rates. The markets immediately concluded that the British regulator would not introduce them, at least in the near future, and rushed to buy the pound. Bailey's speech was much more extensive. The head of the Bank of England, for example, said that the impact on the economy of the coronavirus pandemic is now less than in the spring of last year (during the first "wave"), although now the incidence rates are 10 times higher. According to BA's expectations, GDP in the fourth quarter will not change (+0%) or slightly decrease. BA has very little evidence of the magnitude of the impact on the economy as a result of the third lockdown. The first quarter of the British economy may end with fewer results than expected in the fall. The regulator continues to work to find out the true effectiveness of negative rates. So, Andrew Bailey only postponed indefinitely the moment of introduction of a negative key rate. Or tried to. All the other theses were "dovish". In more simple terms, the BA chairman believes that the British economy may need additional stimulus (weak GDP expectations), he expects GDP to decline in the fourth and first quarters, and reports low information about the consequences for the economy from the third "lockdown". But market participants, as they like it in recent months, again clung to the most optimistic thesis. We have repeatedly noted that the direction of movement of the pair may not completely coincide with the nature of the fundamental background, however, this does not make it easier. One needs to understand what is the current dependence of the exchange rate of a particular currency on this very background. Even though the markets reacted to Andrew Bailey's speech yesterday, we still believe that the dependence is very weak. Since from everything that the BA chairman said, the markets picked up only one thesis and worked it out, and ignored the rest. If today the pound sterling falls – it will be quite logical. First, the markets will work out the entire Bailey performance, not 20%. Secondly, it will fit into the framework of the "swing" mode. At the same time, the continuation of the strengthening of the British currency will be groundless, since working out one thesis said by the head of the Central Bank for two days in a row is out of the ordinary.
The most interesting thing is that just a few hours before Bailey's speech, a member of the Monetary Committee of the Bank of England, Silvana Tenreyro, made a speech. And she just said that the economy needs additional stimulus, and it is very important to keep the possibility of introducing a negative rate. Recall that Andrew Bailey is not the only one who decides to change the rates. The monetary committee has nine members. If the five votes "yes", then Bailey will have to change the rate, in our case, lower it from the current 0.1%. As we have already understood, at least one member of the monetary committee does not rule out the possibility of using this tool in the future. Also, Ms. Tenreyro said that work on studying negative rates continues, and any softer monetary policy can help the economy recover faster and return inflation to target levels (2%) faster.
Thus, we are personally confident that the British economy will contract in the fourth quarter of 2020 and the first quarter of 2021. This is indicated by the forecasts of many agencies and banks. But what the UK central bank will do about it is a question. Recall that rumors about the introduction of negative rates have been going on for more than six months. But first, BA saved this opportunity in case the break with the European Union is still "tough". Now it is waiting for the economic results of the last two quarters. Thus, a further rate cut remains a "last resort" tool. However, based on all of the above, we still conclude that the British economy will shrink. Consequently, the British pound may experience market pressure in the near future. If participants in this market remember that you can not only sell the US dollar and buy the pound. There are also reverse operations. So far, everything still looks like "speculative" growth, which can continue as long as you want. The "bubble" will continue to inflate. And no one knows how long this process will take.
From a technical point of view, the pound/dollar pair resumed its upward movement. But, as we said above, it may be better to pay more attention to the hourly timeframe now. In any case, traders should clearly understand that today the pair has grown by 150 points, and tomorrow it can easily fall by 200. Only in 2021, the quotes have already changed the direction of movement 6 times and crossed the moving average line 6 times.
The average volatility of the GBP/USD pair is currently 120 points per day. For the pound/dollar pair, this value is "high". On Wednesday, January 13, thus, we expect movement inside the channel, limited by the levels of 1.3522 and 1.3762. The reversal of the Heiken Ashi indicator downwards signals a new round of downward movement within the "swing".
Nearest support levels:
S1 – 1.3611
S2 – 1.3580
S3 – 1,].3550
Nearest resistance levels:
R1 – 1.3641
R2 – 1.3672
R3 – 1.3702
Trading recommendations:
The GBP/USD pair started a round of upward movement on the 4-hour timeframe. Thus, today it is recommended to stay in long positions with targets of 1.3672, 1.3702, and 1.3733 until the Heiken Ashi indicator turns down. It is recommended to consider sell orders with targets of 1.3519 and 1.3489 if the price is fixed back below the moving average line.
