The GBP/USD pair also traded higher on Tuesday. Yesterday, we warned that British reports on unemployment and wages look harsh and formidable, yet they rarely provoke a strong market reaction. Indeed, the unemployment rate unexpectedly dropped from 4.4% to 4.2%, against forecasts of 4.5%. One might think this is a good reason for the British pound to show further gains. And it did rise, but is it all that straightforward?

First, we question the significance of the 4.2% figure. All macroeconomic indicators come with inaccuracies, errors, and seasonal factors. Next month, we may see a rebound to 4.4%. Second, wage growth has slowed to 4.5%, which means all inflation is gradually fading away too. The rate of spending growth among the British population is decreasing, and thus, inflation will likely decrease as well. The Bank of England (and other central banks) has repeatedly indicated that high wages are a significant problem for inflation. Third, the number of unemployment benefit claims rose by 135,000 in July against a forecast of +14,500. Remember, the unemployment report is for June, while the unemployment claims report is for July. Thus, we can confidently expect a rise in the unemployment rate in July.

The British pound once again used a formal reason to show growth. The unemployment rate fell—so it's time to buy. That's the market's view. The number of unemployment claims exceeded the forecast "only" by nine times—that's irrelevant. Wages decreased, significantly increasing the likelihood of seeing a second BoE rate cut soon—that's also irrelevant. We're even surprised that the pound rose so modestly!

However, there is no time for further surprise. The UK inflation report will be released this morning, and the U.S. inflation report in the afternoon. One can be sure that most market participants are already rubbing their hands over the "buy" button. If British inflation, God forbid, accelerates more than expected, say above 2.3%, and American inflation drops more than expected, say below 2.9%, there's no doubt—the dollar will immediately plummet.

From a technical perspective, the upward correction at this point is more than justified. Even if the pair shows significant growth today, it will not reverse the downward trend that has developed over the past few weeks in the 4-hour time frame, nor will it overturn the global downward trend in the 24-hour chart. We assume that the market is still reacting to non-existent rate cuts by the Federal Reserve, so when the U.S. central bank starts to lower rates, we might see a rise in the U.S. dollar. Yes, don't be surprised. At that point, all analysts will claim that the market has already factored in 2-3-4 rounds of monetary easing, thus adhering to the "buy the rumor, sell the news" strategy. The market is currently only focused on selling the US dollar... Therefore, if anyone thinks the dollar will fall even further once the Fed starts easing, we fear they will be disappointed.

The average volatility of GBP/USD over the last five trading days is 64 pips. This is considered an average value for the pair. Therefore, on Wednesday, August 14, we expect movement within the range limited by 1.2784 and 1.2912. The upper channel of the linear regression is directed upward, indicating that the uptrend remains intact. The CCI indicator may soon enter the overbought zone again.

Nearest Support Levels:

• S1 – 1.2817
• S2 – 1.2787
• S3 – 1.2756

Nearest Resistance Levels:

• R1 – 1.2848
• R2 – 1.2878
• R3 – 1.2909

We recommend checking out other articles by the author:

Review of EUR/USD on August 14; The market continues to wait for the US inflation report

Trading Recommendations:

The GBP/USD pair continues to hover around the moving average line and has a good chance of sustaining the bearish momentum. We are not considering long positions at this time, as we believe that the market has already processed all the bullish factors for the British currency (which are not much) multiple times. Short positions could be considered at least after the price settles below the moving average. The British pound may continue to correct higher this week, as indicated by the CCI indicator, but whether to act on the correction is up to the traders to decide. The pound will have a good chance to show growth after the U.S. and the UK inflation reports, but the reports themselves need to be positive for that to happen.

Explanations for Illustrations:

Linear Regression Channels: help determine the current trend. If both are directed in the same direction, it means the trend is strong.

Moving Average Line (settings 20,0, smoothed): determines the short-term trend and the 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 24 hours, based on current volatility indicators.

CCI Indicator: Entering the oversold area (below 250) or the overbought area (above +250) means a trend reversal is approaching.