Analysis of GBP/USD 5M

GBP/USD bounced downwards strongly on Tuesday. While the euro had formal reasons to decline, the pound did not. The UK released four reports, two of which were favorable and two were weak. The main point is that the Services and Manufacturing PMIs did not continue their negative trend, and the unemployment rate decreased. Only the number of unemployment benefit claims turned out to be slightly higher than expected. Therefore, the UK reports did not exactly cause the pound's decline. In the United States, both PMIs increased in October and returned above the 50 level, which could have support the dollar. However, the US currency rose all day, and these PMIs were published in the second half of the day.

The trading signals for the pound could have been better, but overall, they weren't bad. The first buy signal near the level of 1.2269 was a false signal, resulting in a loss of about 20 pips. However, the following sell signal near the level of 1.2269 was excellent. The price started to sharply trade lower and showed the same movement until the end of the day, crossing the Senkou Span B and Kijun-sen lines, as well as the level of 1.2215. The trade should have been closed manually, with a profit of at least 95 pips.

COT report:

COT reports on the British pound also align perfectly with what's happening in the market. According to the latest report on GBP/USD, the non-commercial group closed 700 long positions and opened 400 short ones. Thus, the net position of non-commercial traders decreased by another 1,100 contracts in a week. The net position indicator has been steadily rising over the past 12 months, but it has been firmly decreasing over the past two months. The British pound is also losing ground. We have been waiting for many months for the sterling to reverse downwards. Perhaps GBP/USD is at the very beginning of a prolonged downtrend. At least in the coming months, we do not see significant prospects for the pound to rise, and even if we're currently witnessing a corrective phase, it could persist for several months.

The British pound has surged by a total of 2,800 pips from its absolute lows reached last year, which is an enormous increase. Without a strong downward correction, a further upward trend would be entirely illogical (if it is even planned). We don't rule out an extension of an uptrend. We simply believe that a substantial correction is needed first, and then we should assess the factors supporting the US dollar and the British pound. A correction to the level of 1.1844 would be enough to establish a fair balance between the two currencies. The non-commercial group currently holds a total of 65,500 longs and 76,700 shorts. The bears have been holding the upper hand in recent months, and we believe this trend will continue in the near future.

Analysis of GBP/USD 1H

On the 1H chart, GBP/USD remained in a state close to a flat throughout the previous week, but this week has already shown strong movements. The price is currently below the Ichimoku indicator lines, but we still believe that the pair may correct higher. The key level for the pound is 1.2109. The price has bounced off this level many times.

As of October 25, we highlight the following important levels: 1.1760, 1.1874, 1.1927-1.1965, 1.2052, 1.2109, 1.2215, 1.2269, 1.2349, 1.2429-1.2445, 1.2520, 1.2605-1.2620, 1.2693. The Senkou Span B (1.2221) and Kijun-sen (1.2188) lines can also be sources of signals. Signals can be "bounces" and "breakouts" of these levels and lines. It is recommended to set the Stop Loss level to break-even when the price moves in the right direction by 20 pips. The Ichimoku indicator lines can move during the day, which should be taken into account when determining trading signals. The illustration also includes support and resistance levels that can be used to lock in profits from trades.

On Wednesday, there are no important events lined up in the UK. From the US, Federal Reserve Chair Jerome Powell will speak. In addition, traders may also look to the release of the new home sales report in the United States, which is unlikely to significantly impact market sentiment.

Description of the chart:

Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals;

The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals;

Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals;

Yellow lines are trend lines, trend channels, and any other technical patterns;

Indicator 1 on the COT charts is the net position size for each category of traders;

Indicator 2 on the COT charts is the net position size for the Non-commercial group.