The GBP/USD currency pair also sharply and unexpectedly plummeted on Thursday. As we've mentioned before, the cause lies in American inflation. More precisely, the cause is the market itself. It's unclear why the market suddenly started buying dollars based on a report that, by all parameters, fits the definition of "neutral." However, we'll discuss this in more detail below. For now, it should be noted that the price has once again settled below the moving average line, and the continuation of the upward correction is now in question. Even after a week of the British currency's rise, we don't consider the current correction size to be sufficient. The pound has fallen by 1100 points in the last two months, so a 280-point correction seems unconvincing. We'd prefer to see another leg of the correction, and we believe the likelihood of a new rise in the pair remains in the near future.
On the 24-hour timeframe, the price bounced accurately from the critical Kijun-sen line and the 50.0% Fibonacci level at 1.2304. Thus, from a technical point of view, everything is logical. If we only consider the daily timeframe, the pair's decline has already resumed, but we still believe that in the coming days, more attention should be paid to lower timeframes and reversal indicators. We repeat: the probability of another leg of the upward correction remains high.
Furthermore, the market's reaction to the inflation report yesterday was completely illogical. Not only did the indicator itself remain unchanged compared to August, but the actual value also matched the forecast. The market might try to correct this injustice today. Therefore, we wouldn't be surprised if the pair starts to rise today and returns to around the 1.2268 level or thereabouts.
The base inflation has decreased, but this does not explain anything. So, the consumer price index remained unchanged as of the end of August, at 3.7%. Base inflation decreased from 4.3% to 4.1% y/y, which also fully aligned with experts' forecasts. What do these figures mean? In essence, they signify no changes. The fact that base inflation decreased couldn't have triggered the strengthening of the U.S. dollar, as it decreases, not increases, the likelihood of tightening monetary policy. If inflation is falling, why raise the interest rate? We advocate for the Federal Reserve to raise the rate at least one more time by the end of the year, but the dollar clearly shouldn't have strengthened yesterday due to this.
Thus, neither the headline inflation nor the core inflation could and should have triggered the strengthening of the American currency on Thursday. Moreover, the probability of a rate hike on November 1st is currently around 10%. So, based on what did the U.S. dollar rise specifically yesterday when the likelihood of tightening in November decreased even further? We still believe that the dollar should strengthen against the pound, but in the coming days and weeks, we support the scenario of an upward correction.
Today, the macroeconomic and fundamental backdrop will be virtually absent. Patrick Harker's speech from the Federal Reserve is unlikely to shed more light on the Fed's rate situation. In fact, the current situation is so clear that new clarifications are not required. Frankly, it's puzzling why the official FedWatch tool shows a probability of a rate hike in November of only 9.7%, when inflation in the U.S. has not decreased for three months in a row. But with such a fundamental backdrop, it will be harder for the dollar to continue strengthening. In general, the market situation is currently ambiguous, and yesterday's drop in the pair only further complicated the technical picture.
The average volatility of the GBP/USD pair over the last 5 trading days is 109 points. For the pound/dollar pair, this value is considered "average." We anticipate movement within the range defined by the levels of 1.2095 and 1.2313 on Friday, October 13. A reversal of the Heiken Ashi indicator upwards will signal a possible resumption of the upward movement.
Nearest support levels:
S1 – 1.2146
S2 – 1.2085
S3 – 1.2024
Nearest resistance levels:
R1 – 1.2207
R2 – 1.2268
R3 – 1.2329
Trading recommendations:
In the 4-hour timeframe, the GBP/USD pair unexpectedly dropped below the moving average. Therefore, it is currently advisable to maintain short positions with targets at 1.2146 and 1.2085 until the Heiken Ashi indicator reverses upwards. In the event of the price settling above the moving average, long positions with targets at 1.2329 and 1.2390 will become relevant once again. We support this particular scenario.
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both are pointing in the same direction, it indicates a strong trend.
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 in which the pair will trade in the next day based on current volatility indicators.
CCI indicator - its entry into the oversold area (below -250) or overbought area (above +250) indicates that a trend reversal in the opposite direction is approaching.
