29.01.2023 12:49 PM
GBP/USD. Analysis of the trading week of January 23-27. COT report. The British pound is again aiming for growth.

Long-term perspective

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Over the previous week, the GBP/USD currency pair has traded more sideways than up or down, but overall it has maintained an upward trend. As a result, there has been no change in the technical picture over the past trading week. When the pair attempted to begin a correction a few weeks ago, the upward trend swiftly resumed because it was unable to enter the Ichimoku cloud. The price is currently quite close to the previous local maximum, which allows a "double top" pattern to develop. If so, the pair might begin to decline until it reaches 1.1700 or even below. We have always maintained that the British pound should not increase in value. In just a few months, the pound recovered by 50.0% from the prior negative global trend, which lasted nearly two years. Remember that the Bank of England rate and the Federal Reserve rate are both rising and that there has not yet been a single instance where the Bank of England rate has risen faster than the Fed rate. That is to say, it is unclear why the pound is increasing, even if traders paid more attention to the disparity of rates.

If traders were waiting for the Fed to lower the rate of increase because the rate factor has been important in previous weeks, then this factor has already been worked out. Next week, the number of quotes will decline. However, given that the Bank of England's spokespeople hardly ever divulge information regarding monetary policy, many individuals are currently anticipating shocks from the institution. How much the BA will increase the rate is currently unknown. Although it appears to be overdue by 0.5%, the recent recession and eight increases in the previous year would cause it to slow down the rate of tightening once again. We predict that the pound will decline if the rate rises by 0.5% (because this factor has already been recovered) and will collapse if the rate rises by only 0.25%. In any case, we do not anticipate the pound to grow more; however, we believe that given the current state of the market, it might grow for a while.

COT Analysis

The "bearish" sentiment appeared to be waning in the most recent COT report on the British pound. The non-commercial group concluded 6,700 buy contracts and 7.5 thousand sell contracts throughout the week. As a result, non-commercial traders' net position increased by 0.8 thousand. The net position indicator has been slowly rising over the past few months, and although it hasn't yet, it suggests that significant players' attitudes may soon turn "bullish." Although the value of the pound against the dollar has increased recently, it is quite challenging to pinpoint the basic reasons for this growth. There is a need for adjustment, so we cannot completely rule out the possibility that the pound will decline in the near (or medium) term. There are no questions because COT reports have generally matched the trend of the pound sterling in recent months. Purchases could continue for several months, as the net position is still not even bullish. A total of 35,000 contracts for purchases and 59,000 contracts for sales have now been opened by the non-commercial group. While there are technical reasons for this, geopolitics certainly does not support such a significant and quick rise of the pound sterling, so we continue to be wary about the currency's long-term growth.

Analysis of important events

Except for business activity indices, nothing was published in the UK this week. The pair, however, has primarily moved sideways for the whole week, which is consistent with the weak macroeconomic and fundamental backdrop. When the numbers were favorable for the US dollar, they failed to show any growth at the same time. As a result, the market did not respond logically once more. Now, however, it still doesn't matter because the Bank of England and the Fed meetings will be held next week, which will largely determine the direction of trading going forward. According to official predictions, the BA rate will increase by 0.5%. Since the British regulator may surprise itself with its judgment, we think this is the most "subtle" moment of the upcoming week.

Trading strategy for the week of January 30-February 3:

1) The pound/dollar pair adjusted marginally but has already retreated to the region above the Kijun-sen line. As a result, we may now think about making new purchases of the pair with goals of 1.2759 and 1.2630. You can also purchase a pair on the lower TF, especially given that a moving average line serves as a fantastic benchmark. A new strategy for a downward correction will be indicated by fixing quotes below the key line.

2) A new upward trend is still forming for the pound sterling. Although it has cause to do so immediately, the fact that it has surged by 2,100 points in just three months makes a correction now more sensible. Sales, however, are no longer important because the price has risen above the Kijun-sen level. Overcoming the moving average on the 4-hour TF will be one of the first signals to turn the trend into a downward one.

Explanations of the illustrations:

Price levels of support and resistance (resistance and support), Fibonacci levels – levels that are targeted 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 is the net position size of each category of traders;

Indicator 2 on the COT charts is the net position size for the "non-commercial" group.

Paolo Greco,
Analytical expert of InstaForex
© 2007-2023
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