The GBP/USD currency pair continued its sluggish growth on Monday. However, whether sluggish or not, it doesn't matter now, as the growth continues virtually out of nowhere. Recall that last week, there were plenty of important events, some of which could have led to the strengthening of the US dollar, which is heavily oversold and cannot even slightly correct itself. However, as before, the market interpreted all events and reports favoring the British pound. Therefore, the pair continues to grow and has already added 860 points in 2 months, with a maximum downward correction of about 180 points.
It is obvious to everyone that the movement is illogical now, no matter what anyone says. Some analysts believe that the current growth of the euro and pound is quite justified, but we disagree. The problem is that explaining any movement post-factum is very easy and simple. One can always say that the problem lies in the "ambiguous fundamental background" or the "growth of risk sentiment in the market." We analyze in such a way as to provide a clear answer to the question: what caused this or that movement? And even better: to indicate in advance what the movement might be. It is clear that predicting the movement after important events and reports is almost impossible. But the overall trend and medium-term direction are quite possible.
This week in the UK, the results of the Bank of England meeting will be summed up, and at the moment, the market believes that the rate will be raised again. Recall that inflation is not yet reacting to the 11 rate hikes and remains above 10%. Sooner or later, it will start to decrease, but the effectiveness of the British regulator's actions currently needs to improve. We even wonder why raise the rate further, "cooling" one's economy, if it does not lead to the desired result in terms of inflation. In any case, the BOE cannot raise the rate forever. The rate will grow a total of 2 more times by 0.25%.
The American series about public debt
Every year, the United States faces a situation where the money in the budget runs out, and new money cannot be printed or created in accounts immediately. The problem lies in US legislation, which does not allow politicians to "give orders" to the Fed and increase the budget deficit with the wave of a magic wand. Congress must decide on the issuance of new debt securities, which will then be bought by the Fed or the Americans themselves. And Congress consists of two ruling parties. Naturally, the Democrats now need money, while the Republicans use this situation to promote their interests.
In simpler terms, the situation is as follows: Republicans are ready to approve an increase in the limit in exchange for a promise to cut spending in the future. Democrats are refusing such an offer so far, understanding that a possible default will affect everyone, including the Republicans themselves. Therefore, we only observe a political game, the outcome of which is known in advance. Undoubtedly, the public debt limit will be raised sooner or later. There is no such animosity between Democrats and Republicans as there was under Donald Trump.
Nevertheless, US Treasury Secretary Janet Yellen loves to fuel the situation in such cases. This time, she stated that Congress's inability to raise the "ceiling" would lead to a constitutional crisis and sharply reduce the "credit rating" and trust in the federal government. According to Yellen, a decision must be made before the beginning of June, and the longer Congress delays, the more severe the consequences for the country. "If Congress does not do its job, we will all face an economic disaster," Yellen said. In part, we admit that the problem with the dollar lies in this phenomenon, but it is unlikely, as the dollar was confidently falling even before this situation arose. For now, the market situation remains unchanged.
The average volatility of the GBP/USD pair over the last five trading days is 78 points. For the pound/dollar pair, this value is considered "average." On Tuesday, May 9th, we expect movement within the channel to be limited by 1.2554 and 1.2710. A reversal of the Heiken Ashi indicator downward will signal a downward retracement.
Nearest support levels:
S1 – 1.2573
S2 – 1.2512
S3 – 1.2451
Nearest resistance levels:
R1 – 1.2634
R2 – 1.2695
R3 – 1.2756
Trading recommendations:
The GBP/USD pair in the 4-hour timeframe continues to move upward. A sideways movement may resume, but now it is possible to trade up with targets of 1.2695 and 1.2715 until the Heiken Ashi indicator turns down. Considering short positions can theoretically be done after overcoming the moving average, but as practice shows, such signals do not lead to a decline in the pair.
Explanations for illustrations:
Linear regression channels - help determine the current trend. If both are directed in one direction, the trend is strong now.
The moving average line (settings 20.0, smoothed) - determines the short-term trend and direction in which trading should be conducted now.
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 area (below -250) or overbought area (above +250) means that a trend reversal is approaching in the opposite direction.
