Analysis of GBP/USD 5M
The GBP/USD currency pair also traded with minimal volatility for much of Wednesday but saw a sharp rise in the evening. It seems that the market has long priced in all future tightening of the Federal Reserve’s monetary policy, which has yet to occur. Now, as the central bank has declined to raise the key rate for the second consecutive time, despite high inflation, disappointment has set in. Nevertheless, it is important not to jump to premature conclusions. We always say that it takes a minimum of 14-16 hours after a Fed meeting to fully assess the market reaction. We do not rule out the possibility that by midday the GBP/USD pair may return to its original levels, with nothing changing in the dollar’s outlook.
Additionally, the Bank of England’s meeting will take place today, which could trigger significant market volatility. However, support for the British pound is unlikely. If the Fed is even considering a rate hike, the level of British inflation allows the BoE to contemplate resuming its easing cycle. As a result, the British pound may come under pressure today amid sentiment surrounding the British central bank, while the dollar could quickly make up for lost ground.
From a technical perspective, the British pound has broken the descending trendline and may begin to form an upward trend. Today, the British currency faces another test. If it passes this test successfully, we could discuss a new trend that would be justified from a technical standpoint.
On the 5-minute timeframe on Wednesday, the price bounced twice from the 1.3301-1.3309 area, but it failed to resume the downward movement. The signals mirrored one another and yielded no profit. Following the Fed meeting, the pair breached the 1.3301-1.3309 range. Those traders who managed to open long positions could have realized a decent profit, as the target area of 1.3369-1.3377 was achieved.
COT Report
COT reports for the British pound indicate that non-commercial traders have dominated the market with sales for several months. The net position is negative despite the long-term upward trend being intact. Given the events in the Middle East, it is no surprise that demand for risk currencies remains weak. The war is formally over, but the conflict persists. It is this geopolitical context that may support demand for the US dollar in the near term. However, until confirmation below the trendline is established, we would not expect a strong decline in the pair.
In the long term, the dollar will continue to weaken due to Donald Trump’s policies, as seen on the weekly timeframe (illustration above). The trade war will continue in one form or another for a long time, and Trump’s policies aim both directly and indirectly at weakening the US currency. The long-term upward trend remains, as indicated by the trendline. The price has recently interacted with this line and rebounded from it. According to the latest COT report (dated July 21), the “Non-commercial” group opened 13,200 BUY contracts and closed 2,500 SELL contracts. Therefore, the net position of non-commercial traders increased by 15,500 contracts over the week.
Analysis of GBP/USD 1H
On the hourly timeframe, the GBP/USD pair has returned to a downward trend, with no strong reasons for continuation at present. In the long term, both currencies remain on an upward trajectory and have been trading within sideways channels for a year. This does not negate the upward trend that began in 2022. Yesterday, the British pound managed to improve its positions and may be poised for an upward trend. However, today marks the BoE meeting.
For July 30, we identify the following important levels: 1.3042-1.3050, 1.3096-1.3115, 1.3179-1.3187, 1.3301-1.3309, 1.3369-1.3377, 1.3465-1.3480, 1.3588, 1.3671-1.3681. The Senkou Span B line (1.3426) and the Kijun-sen line (1.3330) may also serve as sources of signals. It is recommended to set a stop-loss order to break even when the price moves 20 pips in the correct direction. The Ichimoku indicator lines may shift throughout the day, which should be taken into account when determining trading signals.
On Thursday, the results of the BoE meeting will be announced in the UK, along with a speech from the BoE Chair Andrew Bailey. Most likely, Bailey’s rhetoric will be “moderately dovish,” as will the Monetary Committee’s voting results on the rate. In the US, the PCE index and the second-quarter GDP report will be released. This data may be overshadowed by the BoE meeting.
Trading Recommendations:
Today, traders may remain in short positions targeting the 1.3179-1.3187 area, as the price has settled below 1.3301-1.3309 and bounced off it three times. Long positions can be opened if price establishes itself above the 1.3301-1.3309 area, with a target in the 1.3369-1.3377 range, as the descending trendline has been broken.
Explanations for Illustrations:
- Support and resistance levels are indicated by thick red lines, near which the movement may come to an end. These are not sources of trading signals.
- Kijun-sen and Senkou Span B lines are Ichimoku indicator lines transferred to the hourly timeframe from the 4-hour one. They are strong lines.
- Extreme levels are indicated by thin red lines, from which the price has previously bounced. These are sources of trading signals.
- Yellow lines represent trend lines, trend channels, and other technical patterns.
- Indicator 1 on the COT charts shows the size of the net position for each category of traders.
