Long-term perspective.
The GBP/USD currency pair has fallen by only 60 points in the past week. In any case, a decline is a decline, but please note that the euro currency has declined significantly more than the pound, which is odd given that the pound is a more volatile currency. Nonetheless, the macroeconomic backdrop for the euro and the pound remained roughly the same throughout the week. Thus, we could anticipate roughly the same movements. However, the British pound's price rose unexpectedly for many on Thursday. The growth of "up to" 100 points was not unexpected. The only oddity was that the British pound rose when a new political crisis began. The crisis is new, but the protagonist is old, as every time we discuss a political crisis in the United Kingdom, it is in some way associated with the name of Boris Johnson. How did he remain at the country's helm for so long if we consider all the scandals and "dark stories" associated with Johnson? However, another scandal involving Johnson's "protege," whom he promoted to a high position despite knowing he was being investigated for sexual harassment as the prime suspect, was the "final straw." The Prime Minister's reputation should be impeccable. However, this cannot be said about Johnson. As a result, the Conservative Party initially attempted to declare a vote of no confidence in him due to the "coronavirus parties". However, this failed, and then Johnson got involved in a very timely story, after which approximately 50 ministers and members of Parliament resigned, no longer wishing to work with Johnson. All of this resulted in the resignation of the prime minister. And the British pound has risen as a result of these events. Does this imply that traders believe the change in government will benefit the economy?
COT analysis.
The most recent COT report on the British pound revealed insignificant fluctuations. The non-commercial group opened 4,400 buy contracts and 7,500 sell contracts during the week. Therefore, the net position of non-commercial traders fell by 3,100. What does it matter if the mood of the major players continues to be "pronounced bearish," as shown by the second indicator in the preceding illustration? And the pound still cannot demonstrate a tangible upward correction despite everything? What difference does it make if the British currency is still depreciating if the net position fell for three months and then rose for a few weeks? We have already stated that the COT reports do not account for the demand for the dollar, which is likely still relatively high. Therefore, even with the strengthening of the British currency, its demand must grow faster and stronger than the dollar's demand. The non-commercial group has opened 96 thousand sales contracts and only 39 thousand purchase contracts. Long-term growth in net positions will be required for these figures to at least stabilize. Neither macroeconomic data nor fundamental events provide support for the British pound. We can only rely on corrective growth, but we expect the pound to continue to fall in the medium term.
Evaluation of fundamental occurrences.
This week, almost no significant macroeconomic data was released in the United Kingdom. Only a few business activity indices exhibited very neutral values and, as a result, had minimal influence on the movement of the pound/dollar pair. Friday's US Nonfarm Employment Change report caused a 70-point drop in the dollar, although the market reaction should have been the opposite. However, the dollar began to decline a few hours before the report's release after showing a strong increase earlier. In general, we believe the market began preparing for an unpublished report. It was somewhat nervous about the backdrop of political events in the United Kingdom, resulting in multidirectional movements on Thursday and Friday. Due to Boris Johnson's resignation, it is important to determine whether traders are prepared to purchase the pound because this is virtually the only factor that could theoretically support the British pound. There is, of course, the Bank of England, which is highly likely to raise the key rate in early August for the sixth time in a row, possibly by 0.5%, but we still have to make it to August.
1) The pound/dollar pair has updated its two-year lows this week and generally maintains a long-term downward trend. Thus, purchases are irrelevant and cannot be considered until the price breaks above the Ichimoku cloud. The pair retains theoretical growth potential, but the market sentiment and bulls' desire to purchase are insufficient to anticipate a significant rise in the pound.
2) The pound's downward trend resumed as it fell below the critical line. There are no technical reasons to anticipate an upward movement at this time. Therefore, sales with a target of 1.1410 (100% Fibonacci) are relevant now.
Explanations of the figures:
Price levels of support and resistance (resistance /support), Fibonacci levels – levels used as entry points for purchases and sales. Take Profit levels may be positioned nearby.Ichimoku indicators(standard settings), Bollinger Bands(standard settings), MACD (5, 34, 5).
The first indicator on the COT charts is the net position size of each trading category.
On the COT charts, indicator 2 represents the net position size for the "Non-commercial" group.
