The GBP/USD currency pair has fallen by another 80 points during the current week. The almost landslide fall continues. If in normal times even a strong movement in one direction is replaced from time to time by corrections, now a strong movement in one direction only slows down from time to time. This week, the British currency had a formal reason to continue the decline. Reports on GDP and industrial production in the UK were weaker than forecasts. However, these data were released on Thursday, and the pound fell perfectly on Monday, Tuesday, and Wednesday. The question also remains open, why did the US dollar not fall when the US GDP report declared a decline of 1.4%? That is, GDP growth in Britain by 0.8% is not enough, we sell the pound, and a drop of 1.4% in the US is normal, we buy the dollar? As we have already said, the pound sterling now looks excessively oversold. Although the fundamental, geopolitical, and macroeconomic backgrounds have not supported the pound in the past few months, there are simply no new compelling reasons for its fall now. Even the monetary policy of the BA and the Fed is now almost identical. That is, it cannot be said that the pound is falling because the Fed's monetary policy is more "hawkish". The rates are the same, and the QT programs have not yet started. Therefore, we assume that the pound (and the euro, too) are now falling simply by inertia. Market participants see a strong trend and many want to make money from this movement. We believe that this trend will end with a strong rebound of both the euro and the pound up. However, it's hard enough to say when this will happen. You just need to be prepared for this scenario.
The latest COT report on the British pound has witnessed a new strengthening of the "bearish" mood among professional traders. During the week, the Non-commercial group closed 4 thousand buy contracts and opened 1.7 thousand sell contracts. Thus, the net position of non-commercial traders decreased by another 5,700. The net position has been falling for 3 months, which is perfectly visualized by the green line of the first indicator in the illustration above. Or the histogram of the second indicator. The Non-commercial group has already opened a total of 109 thousand sales contracts and only 29 thousand purchase contracts. Thus, the difference between these numbers is already fourfold. This means that the mood of professional traders is now "pronounced bearish" and this is another factor that speaks in favor of continuing the fall of the British currency. Note that in the case of the pound sterling, the COT reports data very accurately reflect what is happening in the market. The mood of traders is "strong bearish", and the pound has been falling against the US dollar for a very long time. We do not see specific signals for the end of the downtrend yet, but usually, a strong divergence of the red and green lines of the first indicator signals the imminent end of the trend and the beginning of another. Therefore, the conclusion is that an uptrend may begin in the near future, but it is dangerous to try to catch its beginning at the lowest point. The pound may well fall by another 200-400 points.
Analysis of fundamental events.
As we have already said, quite important reports were published in Britain this week. However, the report on inflation in the United States was more important, which showed a value of 8.3% y/y in April. This value was higher than the forecast but lower than the value of the previous month. Thus, something neutral turned out. Initially, the dollar fell after this report, but the next day it grew. We believe that it is too early to conclude. For April, the Fed raised the key rate only once, and that's where all its tightening ends. Therefore, if the rate increase led to a 0.2% drop in inflation, then this is not bad. But this slowdown in the consumer price index could also be a simple accident. After all, even on the upward trend of inflation, there may be rollbacks, slowdowns, and pauses. Thus, according to one report, we would not conclude that now inflation will only decrease. This report also gave no reason to expect the Fed to raise the rate at one of the next meetings by 0.75% since formally inflation has decreased. From our point of view, the next report for May will be important, when it will be possible to see the effect of a 0.5% rate increase.
Trading plan for the week of May 16-20:
1) The pound/dollar pair continues its unadjusted decline with a target of 1.2080 – 76.4% Fibonacci. There is no sign of the beginning of an upward correction, so we still recommend selling the pair. Most factors no longer give such a strong advantage to the dollar as before, but the mood of traders remains "strongly bearish", so the fall of the pound may continue for some time.
2) The prospects for the British currency remain rather vague and so far there is no reason to buy the pound/dollar pair. We believe that it is simply impractical to buy a pair on such a strong downtrend, no matter how attractive the current levels look. We believe that it will be possible to open long positions only above the Ichimoku cloud, and such price consolidation is unlikely to happen in the near future.
Explanations of the illustrations:
Price levels of support and resistance (resistance /support), Fibonacci levels - target levels 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 the COT charts - the net position size of each category of traders.
Indicator 2 on the COT charts - the net position size for the "Non-commercial" group.