The GBP/USD currency pair continued its downward movement on Wednesday after settling below the moving average line. Look closely at the recent upward segment of the British currency: each subsequent pullback was smaller than the previous one, and the CCI indicator entered the overbought zone three times. We warned that the British pound has been rising without apparent reason and is heavily overbought. The decline of the British currency was looming, and since the entire recent surge is a correction, we should now see a new trend.
If this is the case, the pound has good prospects to decline by at least 500-600 points. Naturally, covering such a distance will take a lot of time. The pair may be falling for a month or two, as the price cannot be constantly in a trend. Periods of flat, corrections, pullbacks, and consolidations also occur. But overall, we continue to look only downward.
Yesterday, the British currency had no significant macroeconomic reasons for a decline, but its overbought condition and Andrew Bailey's speech pushed the market to sell. From the macroeconomic reports of the previous day, we can only highlight the ADP report on the number of new non-farm jobs, which turned out to be weaker than expected. However, as we can see, it had no negative impact on the dollar. This means the market changed its attitude towards the pair to bearish. If so, this is what is needed.
The pair's decline is very weak for now, so there is no reason to expect its quick completion. If the British pound had strong growth factors, we could expect a resumption of the upward movement. But there are no such factors; the pound is overbought, and the dollar is undervalued. U.S. statistics could negatively impact the dollar tomorrow, but it will only be for a very short period. The dollar's rise will accelerate if reports from across the ocean are strong.
Bailey refused a new rate hike.
Before analyzing the speech of the Bank of England's chairman, it is worth reminding that all recent speeches by representatives of all central banks have yet to contain any new or unknown information for the market. In principle, all central bank representatives have been repeating the same words in recent months: additional tightening of monetary policy is not required, but in the case of accelerating inflation, the regulator may decide on a new rate hike. Since inflation is falling in the United Kingdom, the United States, and the European Union, there is no reason to expect "hawkish" actions and "hawkish" statements now.
Yesterday, Mr. Bailey followed the established pattern of speeches and stated that the current key rate would remain unchanged. Of course, he did not say that the rate would not be raised under any circumstances, but from his words, an obvious conclusion can be drawn: the current level of inflation does not imply tightening. Thus, if the market expected one or two more tightenings and bought the pound based on this expectation, this growth factor for the British currency would be neutralized. However, we have long said that whatever actions the Bank of England plans, the pound has already worked out all the "bullish" and "hawkish" factors long ago. Thus, we still expect the pair to fall.
Mr. Bailey also noted that the regulator would continue closely monitoring inflation, and its prospects remain uncertain. More than one European official has already mentioned this. Oil and gas prices may rise again, and global geopolitical tension does not stabilize the economy. But in the current circumstances, expecting tightening from neither the Federal Reserve nor the Bank of England is worth it.
The average volatility of the GBP/USD pair over the last five trading days is 93 points. For the pound/dollar pair, this value is considered "average." Therefore, on Thursday, December 7, we expect movement within the range limited by the levels of 1.2456 and 1.2642. A reversal of the Heiken Ashi indicator upwards will indicate a new upward movement.
Nearest support levels:
S1 – 1.2544
S2 – 1.2512
S3 – 1.2482
Nearest resistance levels:
R1 – 1.2573
R2 – 1.2604
R3 – 1.2634
Trading recommendations:
The GBP/USD currency pair has settled below the moving average line, and a new downward trend may begin. Therefore, today, we can advise traders to stay in short positions with targets at 1.2512 and 1.2456. No significant events or publications will exist today, so the dollar may continue to strengthen. Opening long positions will be advisable if the price consolidates above the moving average, with targets at 1.2665 and 1.2695. But in the longer term, we expect a much more significant decline in the pound than now.
Explanations for the illustrations:
Linear regression channels – help determine the current trend. If both are directed in the same direction, the trend is strong.
The moving average line (settings 20.0, smoothed) – determines the short-term trend and direction in which trading should be conducted.
Murray levels – target levels for movements and corrections.
Volatility levels (red lines) – the probable price channel in which the pair will spend the next day, based on current volatility indicators.
CCI indicator – its entry into the oversold territory (below -250) or overbought territory (above +250) indicates an approaching trend reversal in the opposite direction.
