The GBP/USD currency pair continued its downward movement on Thursday, extending the decline following Jerome Powell's speech. Powell nearly pledged to raise rates twice more in 2023. Yesterday, there were no significant events in the UK, while the US released the final estimate of the first-quarter GDP. As mentioned previously, GDP reports seldom trigger a substantial market reaction as their values rarely deviate from the forecast. Nevertheless, exceptions exist for every rule. The final GDP figure surpassed the forecast by 0.6%, signifying a notable deviation and indicating that the US economy is far better than the market anticipated. The unemployment claims report was also considerably lower than expected, confirming a very favorable labor market condition. These two reports prompted a sharp upswing in the dollar.
Yesterday, the dollar received support from the macroeconomic backdrop, but what about its long-term outlook? We maintain the view that the pair should experience a significant decline. Despite the Bank of England's 0.5% rate hike during the previous meeting, the British pound has already appreciated excessively. As previously mentioned, we are not opposing the long-term upward trend; we merely believe a correction is necessary before its continuation. This perspective is evident when observing the 24-hour time frame.
Although the Bank of England's rate hike to 5% and the potential for two or three more increases might sustain the pound for some time, the 24-hour time frame chart suggests that the American economy is experiencing a recession, and it was the Bank of England that enacted more significant rate hikes, contrary to the actual situation. Consequently, we perceive the pound as overbought overall and anticipate a correction.
American statistics are more positive than British statistics. A strong GDP report in the US (albeit weaker than the previous quarter) indicates that the economy is effectively managing high interest rates. It is important to note that unemployment in America remains near its lowest levels in the past 50 years, and the labor market consistently generates a sufficient number of new jobs each month. From our perspective, these three indicators are currently pivotal. While business activity indices and industrial production are significant, their decline is inconsequential if the most crucial reports demonstrate positive results.
Andrew Bailey, the head of the Bank of England, explicitly stated this week that the British economy exhibits resilience despite significant monetary policy tightening. In terms of numbers, this is reflected as follows: 0.1%, -0.1%, 0.1%, 0.1%. These represent the GDP values for the past four quarters in the UK. While there is no recession, there is also no economic growth. Now, let's compare these figures with the last three GDP quarters in the US, whose dollar has been declining for ten months, precisely three quarters: 3.2%, 2.6%, and 2%. The disparity is evident and serves as another factor supporting the oversold dollar.
American statistics have greater strength compared to British statistics. The Federal Reserve's interest rate surpasses that of the Bank of England. Inflation in the US is significantly lower than in the UK. The pound is overbought, while the dollar is oversold. Technical corrections have been considered. There are ample factors contributing to the pound's downward movement. Undoubtedly, the market may continue to follow the upward trend's momentum. However, in such a scenario, one should only trade according to it, disregarding the macroeconomic and fundamental contexts.
The average volatility of the GBP/USD pair over the past five trading days stands at 81 points. For the pound/dollar pair, this value is considered "average." Consequently, on Friday, June 30th, we anticipate movements within the range bound by the levels of 1.2541 and 1.2703. A reversal of the Heiken Ashi indicator to the upside will indicate the beginning of an upward correction.
Nearest support levels:
S1 - 1.2573
Nearest resistance levels:
R1 - 1.2634
R2 - 1.2695
R3 - 1.2756
Trading recommendations:
In the 4-hour timeframe, the GBP/USD pair continues its downward movement. Currently, short positions with targets at 1.2573 and 1.2541 remain valid and should be held until the Heiken Ashi indicator reverses to the upside. Long positions can be considered if the price consolidates above the moving average, with targets at 1.2756 and 1.2817.
Explanation of the illustrations:
Linear regression channels - help determine the current trend. If both channels point in the same direction, it indicates a strong trend.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction for trading.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - probable price channel within which the pair is expected to move in the next 24 hours, based on current volatility indicators.
CCI indicator - its entry into the oversold region (below -250) or overbought region (above +250) indicates an upcoming trend reversal in the opposite direction.
