When to go long on GBP/USD:
Yesterday, several good signals were formed to sell the pound further in the bear market. Let's take a look at the 5-minute chart and see what happened. I paid attention to the 1.2738 level in my morning forecast and advised you to make decisions on entering the market from it. A breakthrough and reverse test from the bottom up of this range, albeit not as bright as we would like, led to a signal to sell the pound further along the trend, which leads to new annual lows every day. As a result, the pair fell by more than 30 points, but did not immediately reach the indicated support at 1.2699. A breakthrough and a similar reverse test of this level from the bottom up during the US session increased pressure on the pair, which created another entry point for short positions, and then to a sell-off to the 1.2645 region, which allowed us to take more than 50 points from the market.
Before analyzing the technical picture of the pound, let's look at what happened in the futures market. The Commitment of Traders (COT) report for April 19 showed that both short and long positions have increased, but there were much more of the former, which is obvious if you look at the GBP/USD chart. The UK economy is in very bad shape, as Bank of England Governor Andrew Bailey confirmed last week. His statements that the economy is heading into recession were the last straw holding back pound bears in the second half of April. As a result, surpassing the annual low and a new major sell-off of the pound has already driven the trading instrument below the 26th figure, and it seems that this is not the end. The consumer price index is climbing steadily into double digits, and a worsening global situation due to disruptions to supply chains amid a new wave of Covid-19 in China creates even more problems. The situation will only get worse, as future inflationary risks are now quite difficult to assess also due to the difficult geopolitical situation, but it is clear that the consumer price index will continue to rise in the coming months. The situation in the UK labor market, where employers are forced to fight for each employee, offering ever higher wages, is also pushing inflation higher and higher. The pressure on the pound is also growing for another reason - the aggressive policy of the Federal Reserve. The Committee may announce an increase in interest rates immediately by 0.75% during the May meeting - they do not have such problems as in the UK with the economy yet. The April 19 COT report indicated that long non-commercial positions rose from 35,514 to 36,811, while short non-commercial positions jumped from 88,568 to 95,727. This led to an increase in the negative value of the non-commercial net position from - 53,054 to -58,268. The weekly closing price fell from 1.3022 to 1.2997.
Yesterday the bears did whatever they wanted in the market. As a result, settling below the 26th figure looks rather depressing - especially if you look at the daily chart. Today, only the retail sales report from the Confederation of British Industry can help the bulls. If the data beats the economists' forecasts, chances of growth above 1.2590 will emerge. If not, nothing will prevent the pound from moving down. In case it falls further, only a false breakout at 1.2528 will provide a buy signal that can stop the downward trend, albeit only for a while. However, we all understand the conditions in which the UK economy is in now and that the bears will become more active with each significant correction. The reason for the build up of short positions is Bank of England Governor Andrew Bailey with his soft policy and the weakening economy before our eyes. Only a return and breakthrough of 1.2590 with a reverse test from top to bottom of this level can create another entry point into long positions, which will increase demand for the pound and lead to growth in the area of 1.2634. The 1.2684 level is the next target, where the average moving averages, playing on the bears' side, are passing. I recommend taking profit there. However, we will be able to get to this level only if large players take profits. In case the pound falls during the European session and the lack of activity at 1.2528, it is best to postpone long positions until the next low of 1.2484. Forming a false breakout at this level can stop the bearish trend for a while and provide an entry point based on a short-term upward rebound of the pair. You can buy GBP/USD immediately on a rebound from 1.2440, or even lower - in the area of 1.2386, counting on a correction of 30-35 points within the day.
When to go short on GBP/USD:
The bears are feeling quite calm today, and most likely they will continue to feel this way. The deterioration of the geopolitical situation plays into their hands, as well as problems with the standard of living of British households, which is falling more and more every day. Trading is below the moving averages, which indicates a likely decline for the pound in the short term. The main task is to protect the 1.2590 range. Forming a false breakout at this level will provide an entry point into short positions in order to continue the bear market and the subsequent renewal of the annual low around 1.2528. A breakdown and reverse test from the bottom up of 1.2528 and another weak statistics on the UK will bring down the GBP/USD to the lows: 1.2484 and 1.2440. The 1.2386 level is the next target, where I recommend taking profits. If the pair grows during the European session and bears are weak at 1.2590, it is best to postpone short positions until 1.2634. I also advise you to open short positions there only in case of a false breakout. You can sell GBP/USD immediately for a rebound from the high of 1.2684, counting on the pair's rebound down by 30-35 points within the day.
Indicator signals:
Trading is below 30 and 50 moving averages, which indicates a further fall in the pair.
Moving averages
Note: The period and prices of moving averages are considered by the author on the H1 hourly chart and differs from the general definition of the classic daily moving averages on the daily D1 chart.
Bollinger Bands
A breakthrough of the lower border of the indicator in the area of 1.2528 will increase pressure on the pair. If the pair grows, the upper border of the indicator around 1.2684 will act as resistance.
Description of indicators
- Moving average (moving average, determines the current trend by smoothing out volatility and noise). Period 50. It is marked in yellow on the chart.
- Moving average (moving average, determines the current trend by smoothing out volatility and noise). Period 30. It is marked in green on the chart.
- MACD indicator (Moving Average Convergence/Divergence — convergence/divergence of moving averages) Quick EMA period 12. Slow EMA period to 26. SMA period 9
- Bollinger Bands (Bollinger Bands). Period 20
- Non-commercial speculative traders, such as individual traders, hedge funds, and large institutions that use the futures market for speculative purposes and meet certain requirements.
- Long non-commercial positions represent the total long open position of non-commercial traders.
- Short non-commercial positions represent the total short open position of non-commercial traders.
- Total non-commercial net position is the difference between short and long positions of non-commercial traders.
