07.02.2023 07:02 AM
GBP/USD. Overview for February 7, 2023

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Without even an indication that a correction was about to start, the GBP/USD currency pair resumed its downward trend on Monday, which started after last week. As market participants might not have enough time to thoroughly process the outcomes of the Fed and BA meetings, as well as Friday's nonfarm payrolls and unemployment in the United States, we forewarned yesterday that the inertia movement could continue on Monday. That is exactly what happened, but because the overall decline in quotes is already above 300 points, the pair should at least begin to move upward. Even the Heiken Ashi indicator, which often responds the quickest to the start of a correction, has not yet come up at this time. The "double top" is still forming, thus the quotes should eventually decline to their previous local minimum (that is, below the level of 1.1841). As we have stated, we are anticipating both the decline of the British and the European currencies. The market has already fully determined how the Fed and BA rates diverge. In 2023, the British pound might still expand, but this will need new, strong fundamental reasons or factors.

The British pound had to adjust downward after increasing by 2,100 points during the previous three months; this should be kept in mind. There was a downward trend developing everywhere you turned. Even though we've been waiting for it previously, it's better now than never. We think that the Bank of England's expected decision to cut down the pace of further tightening of monetary policy at its upcoming meeting may be the main cause of the British pound's decline in the coming weeks. It is unlikely that the regulator can afford to keep raising the rate by 0.5% per meeting given that the BA rate has already gone to 4%. It can increase to 6% at this rate, which is probably not what BA has in mind. In actuality, the UK economy is most susceptible to tighter monetary policy. Andrew Bailey predicts that the recession will persist for at least five quarters. The losses will be roughly 1% of GDP over this time, but if the rate keeps increasing at its current rate, the economic drop might be significantly greater. We believe the regulator is trying to prevent this. To reduce inflation, he will therefore rely on additional factors in addition to his tightening agenda.

The UK GDP figure is significant, but it won't support the pound.

There will only be one significant report this week: the UK GDP for the fourth quarter, as we have already stated. Experts predict that the indicator, which dropped by 0.3% in the previous quarter, may now rise by 0.1%. A 0.1% increase, however, will undoubtedly demonstrate that the British economy is on the verge of recession and that it is still strong enough to support the pound sterling. Trading still repels the market when it comes to making trading judgments. Recall that a similar situation occurred last year when the euro and the pound were declining as a result of geopolitical events and the Fed's rapid rate hike. The pound has been increasing over the past four to five months due to a strong probability of a reduction in the Fed's pace of tightening policy. Now, a new cycle of long-term depreciation may start due to the possibility that the BA may also slow down its pace to a minimum step. And the GDP report won't make the slightest difference.

Currently, inflation is the only report that is truly significant. However, even this doesn't matter much in the UK scenario because the indicator essentially stays the same. If the connection "lower inflation - an increased likelihood of a pause in rate hikes" holds true for other central banks, it does not for the Bank of England because inflation does not decline and the regulator cannot raise rates indefinitely. As a result, for the time being, we think that the pound will keep falling since it lacks growth drivers. The pair confidently consolidated below the crucial level on the 24-hour TF, which is also a strong sell signal. The Senkou Span B line, which at this time runs about the 18th level, is the lowest point to which the quotes can now descend.

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Over the previous five trading days, the GBP/USD pair has averaged 136 points of volatility. This figure is "high" for the dollar/pound exchange rate. Thus, on Tuesday, February 7, we anticipate movement that is contained inside the channel and is constrained by levels 1.1907 and 1.2180. The Heiken Ashi indicator's upward turn indicates the start of an upward correction.

Nearest levels of support

S1 – 1.2024

S2 – 1.1963

S3 – 1.1902

Nearest levels of resistance

R1 – 1.2085

R2 – 1.2146

R3 – 1.2207

Trading Suggestions:

In the 4-hour timeframe, the GBP/USD pair is still falling sharply. So long as the Heiken Ashi signal does not turn up, it is now possible to hold short positions with targets of 1.1963 and 1.1907. If the price is fixed above the moving average line, long positions can be initiated with targets of 1.2268 and 1.2329.

Explanations for the illustrations:

Channels for linear regression - allow us to identify the present trend. The trend is now strong if they are both moving in the same direction.

Moving average line (settings 20.0, smoothed): This indicator identifies the current short-term trend and the trading direction.

Murray levels serve as the starting point for adjustments and movements.

Based on current volatility indicators, volatility levels (red lines) represent the expected price channel in which the pair will trade the following day.

A trend reversal in the opposite direction is imminent when the CCI indicator crosses into the overbought (above +250) or oversold (below -250) zones.

Paolo Greco,
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