Analysis of GBP/USD 5M
The pound traded lower on Wednesday. We experience a range of feelings and emotions in observing the pound's decline. Firstly, we have repeatedly pointed out that the pound is overbought and overvalued. Secondly, the pound has rarely fallen in the past 10 months, making any decline a reason for celebration. Thirdly, the roles have reversed between the pound and the dollar: now the US currency is rising for no specific reason. Overall, we consider it logical for the pound to fall, as it has risen by almost 30 cents in less than a year. Yesterday, there were no important reports published in the UK. The Manufacturing PMI does not deserve such recognition. The US ADP report unexpectedly provoked a strong market reaction, which is not typical for this report.
There were several entry points on Wednesday. First, the pair bounced twice from the level of 1.2762. In the first case, it went up by 20 pips, and traders were able to set a Stop Loss to breakeven, so the trade was closed without profit or loss. In the second case, it did not pass, and the trade closed with a small loss when the price dropped below the level of 1.2762. Interestingly, there was no need to execute the third sell signal, as the first two were false signals. However, around the same time, the ADP report was released, which turned out to be much stronger than forecasted, suggesting at least a slight increase in the US currency. Therefore, traders could take a risk and open short positions. Later, the price dropped to the level of 1.2693, making it possible to gain 40 pips, and the last buy signal yielded a profit of another 20 pips.
COT report:
According to the latest report, the non-commercial group of traders opened 29,800 long positions and 25,000 short ones. Thus, the net position of non-commercial traders fell by 4,800 positions in a week. But in general, it is still rising. The net position has been steadily growing over the past 10 months as well as the pound sterling. Now, the net position has advanced markedly. This is why the pair will hardly maintain its bullish momentum. I believe that a long and protracted downward movement should begin. COT reports signal a slight growth of the British currency but it will not be able to rise in the long term. There are no drivers for opening new long positions. There are no technical signals for short positions yet.
The British currency has already grown by a total of 2,800 pips, from its absolute lows reached last year, which is a significant increase. Without a downward correction, the continuation of the uptrend will be illogical. However, there has been no logic in the pair's movements for quite some time. The market perceives the fundamental background one-sidedly, ignoring any data in favor of the dollar. The Non-commercial group of traders has opened 105,500 long positions and 46,500 short ones. I remain skeptical about the long-term growth of the pound sterling but speculators continue to buy because the pair is growing.
Analysis of GBP/USD 1H
On the 1H chart, the pound/dollar pair continues to trade lower. The bounce from a critical line has triggered a new downward momentum. There are many important events this week, and the reaction to them is unpredictable, which means the pound could show some upward movement. However, we believe that the pair should continue to fall in the medium term since it has breached the ascending trendline, the price is below the Ichimoku indicator lines, and the pound remains overbought.
On August 3, traders should pay attention to the following key levels: 1.2520, 1.2598-1.2605, 1.2693, 1.2762, 1.2863, 1.2981-1.2987, and 1.3050. The Senkou Span B line (1.2943) and the Kijun-sen line (1.2783) can also be sources of signals, e.g. rebounds and breakout of these levels and lines. It is recommended to set the Stop Loss orders at the breakeven level when the price moves in the right direction by 20 pips. The lines of the Ichimoku indicator can move during the day, which should be taken into account when determining trading signals. There are support and resistance levels that can be used to lock in profits.
On Thursday, the market has long been waiting for the results of the Bank of England meeting. This event is strong enough to propel the pound upward again, but this time not for long. The US will release its ISM Non-Manufacturing PMI and the Unemployment Claims data.
Description of the chart:
Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals;
The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals;
Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals;
Yellow lines are trend lines, trend channels, and any other technical patterns;
Indicator 1 on the COT charts is the net position size for each category of traders;
Indicator 2 on the COT charts is the net position size for the Non-commercial group.
