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05.05.2021 03:56 AM
Overview of the GBP/USD pair. May 5. Tomorrow is an important day for the UK and the British pound.

4-hour timeframe

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Technical details:

Higher linear regression channel: direction - downward.

Lower linear regression channel: direction - upward.

Moving average (20; smoothed) - sideways.

CCI: -6.6966

The British pound continued to trade in a "swing" mode on Tuesday. It is already visible on all timeframes, with the possible exception of the youngest ones. In the 4-hour timeframe, the euro/dollar and pound/dollar pairs have been trading almost synchronously in recent days. Thus, if nothing has changed recently for the euro, then for the pound – even more so. On Tuesday, the pair resumed its downward movement, as we predicted. However, in the case of the pound, the reasons for a new downward hike were different. The fact is that each round of the "swing" takes about 250-300 points, so we expect a decline in the area of the 37th level. It should also be noted that despite the "swing" mode, the pair may well resume the upward trend. For example, the last round of the upward trend, which took five months, also took place in the "swing" mode. That is, the pair could go 200 points up and roll back 180 down, then gain 250 and immediately correct for 200. Thus, there was a trend, but there were also constant strong pullbacks and corrections. Fundamentally, nothing changes for the pound. The "speculative factor" and the factor of pumping trillions of dollars into the US economy remain key. It is these factors that continue to keep the British currency so high.

There will be two major events for the UK this week. We say "for the UK" because it is far from certain that the British pound will react to these events. The first thing that is called lies on the surface. It is a meeting of the Bank of England and summing up its results. However, if the Fed and the ECB meetings could be called passing, then the meeting of the Bank of England – even more so. If certain traders were waiting for hints from the Fed about the end of the quantitative stimulus program, no one would wait for anything from the Bank of England.

Moreover, Chairman Andrew Bailey is not even scheduled to speak on May 6. Thus, on Thursday, the results will most likely be announced in the absence of monetary policy changes. Perhaps something interesting will be contained in the accompanying statement of BA on monetary policy. However, there will also be "old arguments" and wording. By the way, on the eve of this event, I would like to remind traders that a few months ago, rumors were actively exaggerated that BA could go for a new reduction in the key rate, which would bring it to a negative level. Andrew Bailey and other BA representatives spoke about the negative rate back in 2020. Then it was said that the regulator is actively studying this issue, studying the experience of central banks that have already resorted to this tool, and sounded the wording that it might take about six months to prepare commercial banks for negative rates. In recent months, Bailey and other BA representatives have been silent on this issue, which provokes the question: has the Bank of England abandoned the introduction of a negative rate, or is it still preparing and will announce it unexpectedly?

In addition to the BA meeting, there will also be elections to the Scottish Parliament this week. Recall that this issue is important for the UK, its geopolitical position, and economy. All the questions come down to one thing. Will the party of Nicola Sturgeon, the First Minister of Scotland, be able to strengthen its position in Parliament and get all the power in its hands? If the majority of parliamentary seats go to her party members, she will be able to make any decisions without looking at the opposition as Boris Johnson is now in the UK. And if Sturgeon can not fear the opposition, it is 100% likely that she will continue to put pressure on London to hold a second independence referendum in the coming years. It is still very difficult to understand exactly how Sturgeon will get official permission from Boris Johnson if he has refused Edinburgh several times and openly stated that the question of independence could be raised once in a generation. However, Sturgeon officially promised in the election program that if her party wins, Scotland will leave the UK by the end of 2023. Thus, the election on May 6 will also be called upon to answer the question of whether the Scots themselves want to leave the United Kingdom, especially now, when the whole Kingdom is just beginning to recover from the consequences of Brexit and the pandemic. In any case, on Friday, it will be possible to draw more or less unambiguous conclusions on this issue.

As we said above, both of these major events may not impact the pound/dollar pair. Therefore, it is now extremely difficult to imagine what the future holds for the pair from a fundamental point of view. On the one hand, over the past year, the pound has reached its peak values and is very overbought. On the other hand, the factor of pumping the US economy with trillions of dollars and the weakness of the bears do not allow us to form even a correction commensurate with the upward trend. Thus, we believe that the "swing" will continue in the near future.

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The average volatility of the GBP/USD pair is currently 99 points per day. For the pound/dollar pair, this value is "average." On Wednesday, May 5, we expect movement within the channel, limited by the levels of 1.3796 and 1.3994. A reversal of the Heiken Ashi indicator downwards may signal a new round of downward movement within the "swing."

Nearest support levels:

S1 – 1.3885

S2 – 1.3855

S3 – 1.3824

Nearest resistance levels:

R1 – 1.3916

R2 – 1.3947

R3 – 1.3977

Trading recommendations:

The GBP/USD pair has started a new round of upward movement on the 4-hour timeframe. Thus, today it is recommended to trade for an increase with the targets of 1.3947 and 1.3977 before the Heiken Ashi indicator turns down. Sell orders should be opened if the price is fixed below the moving average with targets of 1.3855 and 1.3824 and keep them open until the Heiken Ashi indicator turns up. Also, given the continuing "swing," it is not the worst decision to refrain from trading the pair for a while.

Paolo Greco,
Analytical expert of InstaForex
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