GBP/USD – Smart Money Analysis: The Pound Strengthened Following the GDP Report

The GBP/USD pair had been in a virtually uninterrupted decline for eleven days, but this week it has been making determined attempts to end this trend. In the first half of the week, the pound failed to attract traders' interest, while there was also little significant news during those days. On Wednesday, however, several important developments supported the pound. It started with a speech by John Williams, who reduced traders' expectations of another Federal Reserve rate hike in October. The UK GDP report for the second quarter then showed year-on-year growth of 1.4%, compared with the market expectation of 1.2%. This was followed by an important US inflation report, which came in below market expectations and partly confirmed John Williams' comments. As a result, within a single day, the market almost completely abandoned expectations of another Fed tightening in October. I would not say that the dollar collapsed, but it began to decline, while the pound started to rise. The bulls now face a difficult task within imbalance 30. This pattern is bearish and needs to be invalidated if the bulls are aiming for more than a corrective retracement. Friday's Nonfarm Payrolls or unemployment report could help them do this if the figures are weak and confirm the worst concerns about a slowdown in the US labor market.

I would also note that traders continue to expect the Bank of England to implement the same two monetary policy tightenings as the Fed. Moreover, as I have noted, the dot plot points to only one policy tightening. Therefore, the Bank of England could ultimately tighten policy even more than the Fed, which clearly does not support further appreciation of the US currency.

Despite the unfavorable picture for the British pound that has developed in recent weeks, the dollar has also faced numerous setbacks in recent months. If the Fed had not decided to raise interest rates in September and indicated its readiness to tighten policy at least one more time before the end of the year, I would still expect the US currency to decline. I still expect this, but from lower levels. However, the bulls' opportunities are now limited to taking liquidity from the lows of July 28 or June 24, as well as forming new bullish patterns, which require a sustained rise. The chart clearly shows that most reversals over the past year occurred after liquidity was taken, so in my view, this represents a potential opportunity. The bears, meanwhile, have imbalances 29 and 30 at their disposal. Particular attention should be paid to the latter, as it has already been largely worked through. This means that a new sell signal could form in the coming days.

Do the bears still have further potential? In my view, not much, but it should be acknowledged that the dollar remains in a favorable environment. The Fed not only decided to raise rates but also indicated to traders this week that it is prepared to continue tightening. I do not believe that a prolonged decline in GBP/USD can be driven by this factor alone, but in recent weeks the market has done little other than price in the possibility of further FOMC rate hikes. What could prevent it from continuing to buy the dollar for several more weeks against the backdrop of tighter Fed policy?

The technical picture became fully bearish after liquidity was taken from the May highs. The pound reacted to bearish imbalance 27, which triggered a 320-point decline in the pair. Imbalance 25 was the target of the decline, and this pattern was both worked through and broken. New bearish imbalances 29 and 30 were also formed, supporting the bears.

The economic news flow on Wednesday supported the bulls, but they will need further support to break the bearish momentum. The next such releases are due on Friday: Nonfarm Payrolls and the unemployment rate. In my view, the news flow had not previously been strong enough to support an eleven-day advance in the dollar.

The overall news backdrop remains such that, in the long term, I cannot expect anything other than a decline in the US currency. The war between Iran and the United States has not changed my expectations. Geopolitical developments prompted the market to focus on the dollar's safe-haven status for several months, but the conflict has already passed its most acute phase. The future course of FOMC monetary policy remains uncertain, while the market continues to focus only on tightening, which is the main reason for the bears' positive sentiment. In my view, any rise in the dollar is temporary and driven by short-term factors. I would also note that GBP/USD has been trading within a range for an entire year. A range allows for the possibility of virtually any move within its boundaries.

The October 1 economic calendar contains two entries, including the ISM index. The economic backdrop could influence market sentiment in the second half of Thursday's session.

The long-term outlook for the pound remains bullish. The bears have controlled the market in recent weeks, but overall, the range is clearly visible even on the daily chart. Taking liquidity from the swing low of May 1 triggered a new decline, while a sell signal within inverted imbalance 27 allowed the decline to continue. Thus, the pound remains in a virtually uninterrupted decline, which could continue toward the June lows, where liquidity could be taken before a reversal in favor of the pound. However, this week the price could react to bearish imbalance 30.