The GBP/USD currency pair spent most of Wednesday quietly continuing its downward movement. The nature of the British currency's fall is purely technical, as the pair remains heavily overbought and has shown unjustified growth for a long time. Now is the time for a major correction; for this, a fundamental and macroeconomic background isn't even required. However, it is there. For example, on Tuesday in the UK, very weak unemployment and unemployment benefit claims data were released. We have repeatedly drawn traders' attention to the fact that the British economy is much worse than the American one. Just take the GDP indicator; the economy in the States is growing (although the pace of growth is slowing), while in Britain, it has been around zero for four quarters. Inflation in the US has been actively falling for nine months, and in Britain – it only pretends to be falling. The Federal Reserve's rate is higher than the Bank of England's. The Fed could have raised the rate for the last time in May, but the BOE – not an omnipotent genie, cannot constantly raise the rate.
Thus, the pound needed more reason to grow, even in the past month, not to mention the current moment. Over the past four weeks, it has been crawling up. Traders wanted to maintain a good upward trend, and the pair moved inertially. Volatility has greatly decreased for the first time in a long time. Many indicators showed "bearish" divergences and were entering the overbought area. Everything was saying that a strong fall should start. We warned about this a couple of months ago but were slightly off with the timing. Now we expect the pair to fall to the 1.1800 level or thereabouts, from where the last round of growth of the British currency began. Then, the pair may consolidate in the next 3-6 months as the central banks prepare to end the tightening cycle, and the fundamental background will become neutral unless there is another cataclysm or crisis.
The UK economy "shows good results."
The most important event of the past day was a speech by the Governor of the Bank of England, Andrew Bailey, who speaks quite rarely and even less often makes important statements. This time, at the British Chamber of Commerce conference, he made no resonant statements. He noted that the current state of the economy is much more satisfactory than expected at the end of last year, and inflation will show a strong slowdown by the end of 2023. Mr. Bailey noted that the effect of the rate hikes has not yet fully manifested, the economy will show modest growth, and the level of unemployment will increase less than expected a few months ago. The Governor of the Bank of England also noted a decrease in energy prices, which may cause deflationary processes by the end of the year.
The key point was not what Bailey said, but what he did not say. Specifically, he did not mention future rate hikes or that monetary policy tightening would depend on incoming data. The market is gaining more confidence that the monetary policy tightening cycle is either already complete or will be completed at the next meeting. Just as we predicted. After the Central Bank slows down the pace of tightening to a minimum, we should expect another 2-3 rate hikes. The Bank of England has already raised the rate twice by 0.25%, and the next meeting may be the last in the tightening cycle.
Thus, the pound is losing its main growth factor, expressed in higher expectations for the Bank of England's rate than the Fed's rate in 2023. Not only has the pound grown too strong in the last two months, but it also has no factors to maintain its current position. The CCI indicator has managed to enter the oversold area, but we consider this signal "false." The pair cannot enter oversold territory a week after exiting overbought territory. We expect a further decline in the British currency.
The average volatility of the GBP/USD pair over the last five trading days is 100 points. This value is "average" for the pound/dollar pair. Therefore, on Thursday, May 18, we expect movement within the channel to be limited by levels 1.2398 and 1.2598. A reversal of the Heiken Ashi indicator downward signals a resumption of the downward movement.
Nearest support levels:
S1 – 1.2482
S2 – 1.2451
S3 – 1.2421
Nearest resistance levels:
R1 – 1.2512
R2 – 1.2543
R3 – 1.2573
Trading recommendations:
The GBP/USD pair on a 4-hour timeframe has settled below the moving average and has real chances of continuing to fall. Therefore, new short positions can now be considered with targets at 1.2421 and 1.2398 if a Heiken Ashi indicator reverses downward. Long positions can be considered in the event of a price reversal above the moving average, with the first targets at 1.2573 and 1.2598.
Explanations for illustrations:
Linear regression channels - help determine the current trend. If both are directed in one direction, then the trend is strong.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction in which trading should now be conducted.
Murrey 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 area (below -250) or the overbought area (above +250) means that a trend reversal is approaching in the opposite direction.
