There were several entry signals yesterday. Let us have a look at the 5-minute chart and figure out what happened. Earlier, I highlighted the level of 1.2175 and recommended making market entry decisions with this level in mind. Growth and a false breakout at this level produced a sell signal, which resulted in a downward movement of 50 pips. GBP grew after the release of the US inflation report in the afternoon, which led to a false breakout around 1.2234 and produced a sell signal. Afterwards, the pair fell to 1.2118. Bulls asserted themselves in that area, and a false breakout became a reason to build up long positions. GBP/USD later moved up by 110 pips.
When to go long on GBP/USD:
The decline in US inflation has led to a surge in volatility, but failed to build a new bullish trend for the British pound. Today everyone will focus on the British GDP, which will obviously be worse than economists' forecasts. We will also receive data on industrial production, manufacturing production and balance of trade, which are also expected to be quite weak. For that reason, it is better not to rush into buying the pound. A decline and false breakout near the middle of the horizontal channel (1.2158) is a good buy signal. At this level, the moving averages are benefiting the bulls. With this we can establish a stronger uptrend and EUR returning to the new upper limit of the channel at 1.2225. After settling above this level, GBP/USD may surge and test 1.2301. Rising above this level, with a similar test, may push the pair to 1.2350, where I recommend locking in profit.
If the bulls lose 1.2158 in the first half of the day, it will increase pressure on GBP/USD, resulting in a bearish correction triggering the stop loss orders of bulls, who entered the market yesterday after the US data. Because of that, traders are recommended to open long positions if the pair declines and performs a false breakout below the low at 1.2093. You can also buy GBP/USD immediately if it bounces off 1.2008, targeting an intraday correction of 30-35 pips.
When to go short on GBP/USD:
Bears will become aggressive near the upper limit of the horizontal channel (1.2225), which I will highlight. The pound may climb to 1.2225 if we receive good UK data. The bears need to do their best to perform a false breakout of 1.2225, which might be followed by a strong move towards 1.2158 - the middle of the horizontal channel created yesterday. A breakout and an upward test of this level will put an end to the pair's upward momentum and create a sell signal to the lower limit at 1.2093. Below it lies 1.2008, where I recommend locking in profit. If the pair moves up and bears are inactive at 1.2225, it will extend the bullish trend. In this scenario, an entry point for opening short positions will only be formed if the pair performs a false breakout of 1.2301. If there is no activity there as well, you can sell GBP/USD immediately if it bounces off the high at 1.2350, targeting a downward intraday correction of 30-35 pips.
COT report:
Before we look at the chart, let's turn to the futures market. The COT report for January 3 logged a rise in long and short positions with the number of longs exceeding the number of shorts almost four times. This shows that the bulls have little faith in a stronger pound at the beginning of the year. The fact that world regulators are determined to continue the tightening cycle bodes no well for the pound. The UK is already in a recession. The Bank of England is planning to cut interest rates, which is another restraining factor for the currency. If US inflation accelerates again, we will hardly see a stronger sterling in the first quarter of the year. According to the latest COT report, short non-commercial positions increased by 12,454 to 43,625 and long non-commercial positions grew by 3,040 to 43,625. Consequently, the non-commercial net position came in at -20,301 from -5,603 a week ago, which reflects the bulls' unwillingness to buy the pair at the current highs. The weekly closing price of GBP/USD decreased to 1.2004 versus 1.2177.
Indicator signals:
Moving averages
Trading is carried out around the 30-day and 50-day moving averages, which indicates that the pair is moving sideways.
Note: The period and prices of moving averages are viewed by the author on the hourly chart and differ from the general definition of classic daily moving averages on the daily chart.
Bollinger Bands
If GBP/USD rises, the indicator's upper limit at 1.2235 will serve as resistance.
Indicator description:
- Moving average (MA) determines the current trend by smoothing volatility and noise. Period 50. Colored yellow on the chart.
- Moving average (MA) determines the current trend by smoothing volatility and noise. Period 30. Colored green on the chart.
- Moving Average Convergence/Divergence (MACD). Fast EMA 12. Slow EMA 26. SMA 9.
- Bollinger Bands. Period 20
- Non-commercial traders are speculators such as individual traders, hedge funds, and large institutions who use the futures market for speculative purposes and meet certain requirements.
- Long non-commercial positions are the total long position of non-commercial traders.
- Non-commercial short positions are the total short position of non-commercial traders.
- Total non-commercial net position is the difference between the short and long positions of non-commercial traders.
