The GBP/USD currency pair experienced a slight correction on Monday but remained in a strong, short-term, upward trend. The current trend period raises many questions, as we have discussed before. Such explosive growth, reminiscent of Bitcoin, often serves as a precursor to a prolonged decline. Traders are using the last chance to buy in fully, but they will soon start to take profits on long positions, which will be a harbinger of a new downward trend. Of course, this is just a hypothesis, and any hypothesis requires confirmation. So far, there are none. However, let's draw traders' attention again: even in the short term, the pound shows such strong growth that it needs to be more consistent with the macroeconomic and fundamental background.
Over the past few months, we have repeatedly mentioned that we expect a decline in the British pound. The decline has yet to begin, and the British currency cannot even correct itself properly, especially in the 24-hour time frame. Let's ask ourselves: Is the British economy really that strong, and is the Bank of England's stance aggressive enough for the pound to show a rise of 2500 in three quarters? The answer is obvious. Of course, part of this trend should be attributed to a simple technical correction after a significant decline. Another part of the trend is the pound's recovery after Liz Truss's departure. But even with these two "buts," it seems too much.
Interestingly, such a momentum trend can continue for some time. The market sees that the pound is growing and logically continues to buy, even though there are no grounds for it. Therefore, the conclusion remains the same: the pound is rising illogically, and at any moment, this growth may end with a crash, but the upward trend can continue for as long as the market deems necessary, largely ignoring the fundamental background.
Events this week may cause a decline in the pound
This week, the Bank of England will hold its regular meeting in the UK. The key rate is likely to increase for the thirteenth consecutive time, which is unsurprising. We receive very few comments and forecasts from Bank of England representatives, making it extremely difficult to predict the regulator's future actions. However, the market does not doubt that monetary policy will be tightened again. If so, this decision has already been priced in. However, if even one "dovish" hint comes from the Bank of England's corridors, it could end badly for the pound.
It is evident to everyone that the Bank of England can only maintain elevated interest rates for a limited period. The rate has already reached 4.5%, and after a deceleration in the tightening pace, two 0.25% rate hikes have already been implemented. This week might witness the occurrence of the third and final hike. The British economy has teetered on the brink of recession for four consecutive quarters, and each subsequent rate increase further raises the likelihood of a recession commencing within this year. However, we have been aware of all these factors for quite some time.
On Monday, there were no noteworthy developments concerning the dollar or the pound. Tuesday will also have scarce news. The real excitement will commence on Wednesday when Jerome Powell, the Chairman of the Federal Reserve, makes his debut appearance in Congress. This event might go unnoticed, as Mr. Powell will provide an account of the Federal Reserve's operations and respond to inquiries from senators and congress members. Since the Federal Reserve is an independent entity not subject to the control of the US government, Powell has no reason to fear. He will not face job loss and can address questions according to his own judgment.
It is no secret that US authorities would prefer a less aggressive monetary policy since the regulator's actions have led to a banking crisis. But again, Powell and his colleagues have a different view on this matter: inflation is their top priority. We do not expect any "dovish" statements from Jerome. Accordingly, we do not expect the dollar to weaken after his speeches in Congress. The pound has excellent chances of starting a decline this week if the fundamental background means anything to the market.
The average volatility of the GBP/USD pair over the past five trading days is 94 pips. For the GBP/USD pair, this value is considered "average." Therefore, on Tuesday, June 20, we expect movement within the range limited by the levels of 1.2685 and 1.2873. An upward reversal of the Heiken Ashi indicator will signal a resumption of upward movement.
Nearest support levels:
S1 - 1.2756
S2 - 1.2695
S3 - 1.2634
Nearest resistance levels:
R1 - 1.2817
R2 - 1.2878
R3 - 1.2939
Trading recommendations:
On the 4-hour timeframe, the GBP/USD pair continues its upward movement, so long positions with targets at 1.2817 and 1.2873 are currently relevant. These positions should be opened in case the Heiken Ashi indicator is reversed upwards. Short positions can be considered if the price consolidates below the moving average with targets at 1.2634 and 1.2573.
Explanation of the illustrations:
Linear regression channels - help determine the current trend. The trend is currently strong if both channels are directed in the same direction.
Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction for trading.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the probable price channel in which the pair will move in the next 24 hours, based on current volatility indicators.
CCI indicator - its entry into the oversold area (below -250) or overbought area (above +250) indicates an upcoming trend reversal in the opposite direction.
