On Thursday, the GBP/USD currency pair fell by another 100 points, breaking out of the sideways channel in which it had remained for about three weeks. As the price exited this flat range through the lower boundary, the likelihood of a further decline in the British currency sharply increased. However, we'd like to remind traders that there's no situation in the foreign exchange market where one can be 100% certain about the movement. There have been instances when the price moved in the opposite direction after exiting a sideways channel through one boundary. Moreover, Jerome Powell is scheduled to speak today. Even though many anticipate hawkish rhetoric from him, it doesn't necessarily mean traders will receive such guidance.
Nevertheless, if we rely on the technical picture and consider the most likely scenario, the pound should continue its decline. Currently, almost all factors indicate this. Consider this: the fundamental backdrop in favor of the pound has been fully priced in by the market several times; the pair rose almost 3000 points in 11 months with minimal corrections; the macroeconomic background in the UK is much worse than in the US; the Bank of England's rate is lower than the Federal Reserve's; and on the 24-hour timeframe, the price has finally overcome the Ichimoku cloud. In our view, nearly everything now points to the pound continuing its downward trend.
The market bought the pound for a long time simply because it was rising. This is an inertial trend, where there's no actual basis for buying, but the market doesn't need a reason to purchase. Hence, we observed an unnecessary 4-5 month pound rise. We noted earlier this year that growth factors for the pound were diminishing. As we see, the market had its timeline. However, nothing lasts forever, and every trend eventually ends.
What to expect from Powell
Strictly speaking, the Jackson Hole Symposium is not such an important event. Recall how many times a year the heads of central banks speak at various conferences, forums, and so on! Not every speech provokes a market reaction, and not every speech conveys crucial information. For instance, Christine Lagarde has been repeating the same mantra for over a year: inflation is high, and we continue tightening. However, the European Central Bank's rate has been rising much slower than the BOE's or the Fed's and started increasing much later. Therefore, any statements by Jerome Powell will also be interpreted through the market's perception. Since the trend has likely shifted downward, the market will search for hawkish undertones in Powell's words. If he mentions another rate hike (regardless of when it might happen), it might be enough for the pound to continue its decline and the dollar to rise.
There's also a possibility that Powell might stick to generic statements. In this case, the market will have nothing to react to. Therefore, we might see little movement today. However, the fact that the pound fell yesterday, dropped overnight, and continues to fall in the morning suggests that the market expects hawkish rhetoric from the Federal Reserve's head. This indicates a market sentiment leaning towards buying US dollars. Therefore, the likelihood of a further decline today is higher than the chances of a correction. The pair had three weeks to correct themselves, but all they showed was sideways movement.
The average volatility of the GBP/USD pair over the last five trading days is 101 points. For the pound/dollar pair, this value is considered "average." On Friday, August 25th, we anticipate movement within the range bounded by levels 1.2462 and 1.2664. A turn of the Heiken Ashi indicator upwards will signal a new round of bullish corrections.
Nearest support levels:
S1 – 1.2573
S2 – 1.2543
S3 – 1.2512
Nearest resistance levels:
R1 – 1.2604
R2 – 1.2634
R3 – 1.2665
Trading recommendations:
The GBP/USD pair in the 4-hour timeframe has resumed its downward trend. Thus, at this time, it is advisable to remain in short positions with targets at 1.2512 and 1.2462 until the Heiken Ashi indicator turns upward. Consider long positions only after the price firmly settles above the moving average line, with targets at 1.2726 and 1.2756.
Illustration explanations:
Linear regression channels - help determine the current trend. If both point in the same direction, the trend is strong now.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and the direction in which trading should be conducted.
Murrey levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel the pair will trade over the next day based on current volatility indicators.
CCI Indicator - its entry into the oversold area (below -250) or the overbought area (above +250) means a trend reversal is nearing in the opposite direction.
