On Friday, the GBP/USD currency pair showed a strong upward movement. Most of the observations made in the EUR/USD analysis can also be applied to GBP/USD. While the euro had limited reasons to rise by 100 pips in a single day, the pound had even fewer reasons for a 150-pip increase. This is particularly notable since the UK business activity indices were more contradictory than those in the Eurozone. Although they indicated growth, it was quite ambiguous. Additionally, the British pound began its rise overnight, even before any reports were released, suggesting that these reports were not the catalyst for the movement. Following the release of mixed U.S. business activity data, the dollar continued to decline, even though these indices also couldn't explain such a significant movement. Typically, when the market reacts to data releases, the movement occurs quickly—within one or two candles. However, in this instance, both the euro and the pound increased steadily throughout the day.
From a technical perspective, GBP/USD shows an upward trend similar to that of EUR/USD. Nevertheless, there is little confidence in the current growth of the British pound. How many disappointing UK economic reports have emerged in January? Despite these setbacks, the pound has been consistently rising in recent weeks. As a result, this situation appears more like the dollar weakening rather than the pound strengthening. The dollar has been on the rise for 3.5 months, and traders likely need time to take profits and open new short positions.
A notable technical signal was a buy signal near the 1.2349 level; however, it formed overnight, which means few traders likely acted on it. The next signal—a bounce from the 1.2429 to 1.2445 zone—turned out to be false, though the price did drop 20 pips. Consequently, this trade would have closed at a breakeven Stop Loss. Later, another buy signal emerged near the 1.2429 to 1.2445 area, allowing traders to gain around 30 pips. While the overall price movement for the day was impressive, the trading signals were not optimal.
The Commitment of Traders (COT) reports for the British pound indicate that commercial traders' sentiment has fluctuated consistently over recent years. The red and blue lines in the reports, which represent the net positions of commercial and non-commercial traders, frequently intersect and typically remain close to the zero mark. Currently, these lines are near each other, suggesting that the number of buy and sell positions is roughly equal.
On the weekly timeframe, the price initially broke through the 1.3154 level but then retraced back to the trendline, which it successfully breached. This break of the trendline strongly indicates that the decline of the pound is likely to continue. However, there has also been a rebound from the previous local low on the weekly chart, which could point to a range-bound market.
According to the latest COT report, the non-commercial group has closed 4,800 buy contracts and opened 3,800 sell contracts. This resulted in a decrease of 8,600 contracts in the net position of non-commercial traders, which is not a positive sign for the pound.
The fundamental outlook does not provide any justification for long-term purchases of the British pound, and the currency remains at risk of continuing its global downward trend. Consequently, the net position may continue to decline, signaling a further reduction in demand for the British pound.
On the hourly timeframe, the GBP/USD pair is currently following a local upward trend. While we do not see any long-term basis for the British pound to appreciate, the short-term trend indicates potential for upward movement. Therefore, it is advisable to consider long positions on lower timeframes. However, from a long-term perspective and on higher timeframes, we do not recommend taking long positions at this time. This week and next week are important, as meetings of the Federal Reserve and the Bank of England will take place, which could significantly alter market dynamics.
For January 27, we have identified the following key levels: 1.2052, 1.2109, 1.2237-1.2255, 1.2349, 1.2429-1.2445, 1.2511, 1.2605-1.2620, 1.2691-1.2701, and 1.2796-1.2816. Additionally, the Senkou Span B line (1.2336) and Kijun-sen (1.2363) may provide useful trading signals. It is recommended to set a Stop Loss at breakeven once the price moves 20 pips in the desired direction. Keep in mind that the Ichimoku indicator lines may shift during the day, which should be considered when evaluating trading signals.
For Monday, there are no significant events scheduled in either the UK or the US, and the UK is expected to remain quiet throughout the week. However, the upcoming Federal Reserve meeting and the U.S. GDP report should serve as reminders of the strength of the dollar and the U.S. economy.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
InstaSpot analytical reviews will make you fully aware of market trends! Being an InstaSpot client, you are provided with a large number of free services for efficient trading.
