Long-term perspective.
The GBP/USD currency pair also showed a downward movement this week but was much weaker than the EUR/USD pair. Thus, the pound still shows a persistent reluctance to decline, although it has more reason to do so than the euro. The British pound has risen stronger than the euro in the last 2.5 and 9 months and corrected weaker. The British economy could be much better than the American one. The Bank of England has raised the rate 12 times but has yet to slow down inflation significantly. And it can't raise the rate any further, as it has already reached the "limiting" value. The new tightening of monetary policy will lead to a recession, which the regulator wants to avoid by all means.
In addition, Andrew Bailey has been hoping for a decline in inflation "in the near term" for five months. At the beginning of the year, he stated that inflation would decrease to 2.9% in December; now he expects a slowdown to 5%, and only inflation itself does not agree with the head of the Bank of England and remains above 10%, paying no attention to all the regulator's efforts. Therefore, we need help answering why the pound has grown for 2.5 months. Nevertheless, it has grown, is heavily overbought, and does not want to fall. We have already said that you can't argue with the market. No matter the fundamental and macroeconomic background, if the market buys, the pair will appreciate, regardless of anything. But if we proceed from the "fundamentals" and macroeconomics, the British currency should have been down long ago.
There were a few fundamental events in the UK this week. Andrew Bailey, Dave Ramsden, and several other representatives of the Bank of England gave speeches. They talked about everything but monetary policy. The issues of the QT program, inflation, and the state of the banking sector were covered. The regulator is signaling the end of the monetary policy tightening cycle, which again should pressure the pound. But it has not yet.
COT Analysis.
According to the latest report on the British pound, the "non-commercial" group opened 5.8 thousand buy contracts and closed 2.2 thousand sell contracts. Thus, the net position of non-commercial traders has grown by 8 thousand contracts and continues to grow overall. The net position indicator has steadily grown for 9–10 months. Still, the mood of the big players has remained "bearish" all this time (only now can it be said to be "bullish," but formally). Although the pound sterling is growing against the dollar (from a medium-term perspective), it is very difficult to answer why it is doing so from a fundamental point of view. We do not exclude the possibility that the pound will decline strongly soon. Perhaps it has already started.
Both major pairs are moving roughly the same right now, but the net position for the euro is positive and implies an ending of the upward impulse. At the same time, the pound fully allows for further growth as it is neutral. The British currency has risen by 2300 points, which is a lot. With a strong downward correction, the continuation of growth will be logical (even if we ignore the lack of fundamental support). The "non-commercial" group now has 64.8 thousand sell contracts and 77.4 thousand buy contracts open. We still look skeptically at the long-term growth of the British currency and expect it to fall, but the inertial movement upwards can continue.
Fundamental event analysis.
There were several important publications in the UK this week. On Tuesday, data on unemployment and claims for unemployment benefits were published, which turned out to be worse than forecasts. Although there were few reports, the pound could and should have shown a drop in this information. It needed to be stronger, given the current circumstances. There were also few macroeconomic statistics in the States. The retail sales report was weaker than forecasts, and industrial production - stronger. The number of applications for unemployment benefits for another week is below expectations. The statistics could have been more important and neutral in their values.
However, the general fundamental background and the overbought pair should still favor the American currency. Unfortunately, the pound continues to demonstrate amazing resistance.
Trading plan for the week of May 22–26:
- The GBP/USD pair started to decline last week, which could be another micro pullback. The price has settled below the critical line, so the decline may continue with the aim of the Senkou Span B line, which lies at the level of 1.2165. Small sales with transaction support on the 4-hour TF are now appropriate. The overall potential for the pair to fall is large, 500-600 points.
- As for purchases, further upward movement is highly questionable after a rise of 2300 points without strong corrections. Also, remember that the fundamental background supporting the pound is absent. Therefore, longs still need to be relevant. Formally, they will become relevant in case of a new consolidation above the critical line, but even in this case, they should be cautiously approached.
Explanations of the illustrations:
Price levels of support and resistance, Fibonacci levels - targets when opening purchases or sales. Take Profit levels can be placed near them.
Ichimoku indicators (standard settings), Bollinger Bands (standard settings), MACD (5, 34, 5).
Indicator 1 on COT charts - the size of the net position of each category of traders.
Indicator 2 on COT charts - the size of the net position for the "non-commercial" group.
