GBP/USD - 24H.
The GBP/USD currency pair was trading very actively this week. However, it is very difficult to explain all the pair's movements from the point of view of fundamental analysis. The euro/dollar pair has been standing almost in one place all week, and the pound/dollar pair has gone down 260 points and up 200. Why? It turns out that the data from the UK provoked such a movement? But there was no special news of a macroeconomic nature from the UK this week. It turns out that it's not about "macroeconomics." It turns out that the main reason was some nervousness of the traders themselves, which can only be based on data about the fourth "wave" of the epidemic. In the articles last week, we already said that a powerful fall in the pound does not look quite logical since the data on the epidemic is certainly important data.
Nevertheless, the foreign exchange market should respond to the macroeconomic consequences of the pandemic and not to the pandemic itself. It is clear that the more sick and dead there are in Britain, the worse its economic prospects become, and the more chances there are for a new quarantine. However, London, on the contrary, lifted all quarantine restrictions this Monday. Thus, we believe that the markets panicked about the "fourth" wave, and then they realized that this was not entirely logical and began to restore the pair. We also said earlier that we expect the pair to decline to the area of 1.3600-1.3666. On the 24-hour timeframe, it is visible that the previous local minimum of the last correction round is located in this area. Thus, the overall picture is similar to the euro/dollar pair. We expect the formation of a new upward trend from the current positions, and we consider the current round of correction to be completed. Confirmation of this hypothesis should be sought on the lower timeframes.
During the last reporting week (July 13-19), the GBP/USD pair fell by 200 points. The data of the latest COT report fully support this development of events: the net position of non-commercial traders is falling, and the pound exchange rate is also falling. Thus, everything seems to be logical. However, the first indicator in the illustration above clearly shows not the end of the upward trend but the beginning of a new downward trend. The green and red lines have crossed, which means that the traders' mood is already "bearish." Recall that the green line is the net position of the "Non-commercial" group, and the red line is the net position of the "Commercial" group. Therefore, professional players have already opened a greater number of contracts for sale at this time than for purchase. And this suggests that the major players believe in a further fall in the British currency. But the same factor also works here as for the euro/dollar pair. Trillions of dollars continue to pour into the American economy, due to which its rapid recovery is achieved. However, while the money supply is growing, inflation is growing, which devalues the dollar much faster than the sales of major players of the British currency. Therefore, we have every right to expect that the pound will also begin to rise in price again simply because the factor of inflating the money supply in the United States is more global. Major players immediately opened 11,600 contracts for sale during the reporting week and closed 1,100 contracts for purchase. Their net position decreased by 12,700 at once. They already have more open sell positions than buy positions. However, the pound barely managed to get to the last local minimum on all these actions of major players, which was formed even when the mood of traders was "bullish."
During the current week, there were practically no important publications and events in the UK. The only data that really should have been paid attention to is the data on business activity on Friday. The reports themselves did not provoke any market reaction. However, they have deteriorated quite seriously compared to previous values. For example, the index of business activity in the manufacturing sector decreased by 3.5 points, and in the service sector – by almost 5. They remained above the level of 50.0, so the decline is not critical. However, it reflects the falling mood of top purchasing managers, who expect the situation to worsen. And this can only be due to the virus spreading through the UK. By the way, the fourth "wave" seems to have begun to weaken after all. Yesterday, "only" 36 thousand new cases of the disease were recorded. It's still a lot, but it's already less than 54 thousand. And the dynamics are also pleasing. Therefore, the pound may soon get grounds for further strengthening.
Trading plan for the week of July 26-30:
1) The pound/dollar pair has worked out the area of 1.3600-1.3666. Thus, there are reasons to assume the completion of a downward correction. We believe that now the pair will continue to grow in the long term. However, it needs to overcome the critical Kijun-sen line. We also remind you that on a 4-hour timeframe, a sign of an upward trend is finding the price above the moving average line (the "Regression Channels" trading system) or above the key lines of the Ichimoku indicator.
2) Sellers squeezed out of the pound/dollar pair everything they could at this stage. So far, the chances of continuing the downward movement remain high, but a sharp rebound from the level of 1.3600 suggests that this is the end of the downward movement. Therefore, sales can be considered again if the price bounces off the Kijun-sen line and fails to gain a foothold above it. In this case, the price may once again fall to the level of 1.3600 or slightly lower.
Explanations to the illustrations:
Price levels of support and resistance (resistance/support) – target levels when opening purchases or sales. Take Profit levels can be placed near them.
Ichimoku indicators, Bollinger Bands, MACD.
Support and resistance areas – areas from which the price has repeatedly bounced earlier.
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.
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