FX.co ★ Crazy speculation on the pound sterling

The pound sterling is not just trading firmly at the local high of the medium-term trend, it is making higher highs on a regular basis. Everything would be fine unless the UK economy was not enveloped by deep troubles. So, the ongoing steady rally of the national currency is viewed as purely speculative in nature, which could be interrupted by another collapse in the market.

Market participants are overwhelmed by the speculative excitement for a fairly long time. Initially, GBP owed its strength to widespread sell-offs of the US dollar in the fall last year. Later in the year, speculators seized on the issue of the Brexit deal with the EU, without delving into the topic of the concluded deal. In the meantime, the catalyst for GBP's bullish run is the news that the United Kingdom is reporting a rapid decline in the number of coronavirus infections and the vaccination program is better than anywhere else in the world.

Most experts are skeptical about the flow of information about the decline in the coronavirus rates as well as the prospects of easing restrictive measures. Such developments are going on not only in the UK.

The virus will eventually recede and will be taken under control - no one argues with this, but the economic problems that it will leave as a legacy will affect businesses and the population for a very long time.

Investors are anticipating the time when lockdown measures will soon be softened. I think it is not appropriate to drive the exchange rate of the sterling skyward, since sooner or later this unjustified growth, from the point of view of the foundation, may turn into a collapse, and not a full-fledged trend, which most speculators hope for.

Interestingly, the media, which currently serve as a helm for speculators, are beginning to press more and more on their opinion that the strength of the pound sterling rests on some fundamentals. All this is very similar to a big game where they fatten hamsters before taking their money away from them.

Time will tell. Meanwhile, we should be careful not to become hamsters who will be dropped off from the market.

What happens on the trading chart?

It took speculators only two trading days to break through the important psychological area of 1.3950/1.4000/1.4050. Considering the high degree of overbought in the pound sterling, many questions arise. How did they do it? Taking into account the available data, we can safely say that the GBP/USD trading instrument has elapsed under the pressure of speculators.

In simple words, speculators have the main position, which gives them the right to move the quotes, no matter what.

Now imagine if speculators are a little intimidated by a large volume of short positions. In this case, an uncontrolled change in trading sentiment may occur. In other words, GBP/USD will go through not a technical correction, but a true collapse in the market, as, for example, it was in the early days of Brexit.

There are plenty of reasons for a trend reversal, if the fundamentals are not enough for you, then open the daily chart and you will see that the pair is trading at the highs of 2018. A further upward movement will not just lead to a higher high. It will jeopardize the long-term downward trend, and the quotes will automatically teleport us to the levels of 2016, which is considered a complete absurdity under this economic situation.

Expectations and prospects

Looking at the trading chart relative to the current day, you can see that during the Asian session, where liquidity is a priori, there is another surge of activity directed towards long positions in the pound sterling. This spike of 100 pips pushes the quotes to 1.4224, leaving a gap of less than 200 pips to the 2018 high.

In this situation, even speculators working on the inertial course understand that trading sentiment can change dramatically, where the primary pullback relative to the overnight surge is only the smallest part of the possible reaction in the market.

It is worth paying special attention to the highest levels of 2018 since they are important for making trading decisions. In this case, traders regard the area as possible resistance, which, quite possibly, is already putting pressure on long positions.

In the event of a full-size correction, the pound sterling may well drop by 500-700 pips due to extremely overbought market conditions.

How about speculation?

Things are not so simple here, due to the risk of a price reversal, speculative positions can become very risky if you are bullish. That is, a reversal may occur at any time. If nevertheless, you are considering speculation with long positions, then you should work on updating the curve maximum. In this case, these are coordinates 1.4224, with a move towards 1.4300 / 1.14340.

What is happening in the market in terms of indicator analysis and market dynamics?

Analyzing different sectors of timeframes, we see that technical instruments on the hourly and daily periods signal a buy due to the movement of the quotes at the peak of the trend. Minute intervals signal a sell due to a local pullback from the trend peak

In terms of market dynamics, the acceleration is recorded, just due to the dynamics during the Asian session. If you study the general picture of volatility, you will see a process of slowing down the length of several months.

Key levels

Resistance zones: 1.4350 **; 1.4550; 1.4700; 1.5000 ***.

Support Zones: 1.4000 ***; 1.3750 **; 1.3650 **; 1.3300; 1.3000 ***

* Periodic level

** Range level

*** Psychological level