FX.co ★ GBP/USD – Smart Money Analysis: An Unexpected Market Reaction

The GBP/USD pair has lost its bullish momentum, but the bullish advance is still not over. In my view, the pound's salvation lies in the hands of the euro. At present, the euro currency is still maintaining a bullish bias and has not invalidated its two latest bullish imbalances. These imbalances could save both the euro and the pound. As I said earlier, I see no reasons for the bears to launch an advance. This week, traders could observe paradoxical movements. During the first three days of the week, the dollar had no reasons to rise, but it did. On Thursday, the dollar had grounds to rise, but it fell. Today, the US currency could have risen by at least 100 points, but instead it declined by literally 10–20 points. Therefore, I cannot describe the current movements as logical, especially in the pound. I believe that the technical picture for the euro is currently more logical and informative. Despite the strong August Nonfarm Payrolls report, the overall picture in the labor market has not changed, while at least two FOMC members spoke out against changing the interest rate in the near future this week. I believe that the Fed will not tighten policy in September. If the euro currency rebounds from its two imbalances and begins an upward move, I expect the pound to rise as well, even without the formation of signals or patterns and despite the two bearish imbalances.

Over the past month, the dollar has suffered numerous setbacks, including the US Treasury's decision to increase the volume of long-term bond buybacks, weak monthly Nonfarm Payrolls reports, a weak annual Nonfarm Payrolls report, a slowdown in the Consumer Price Index, a slowdown in GDP growth, and declining market expectations for Fed monetary policy tightening. This week, the only factors supporting the dollar were the Nonfarm Payrolls report (for the first time in a long while) and the ISM Services PMI. However, at the most critical moment, the bulls retreated despite having all the cards in their hands. All that remains is to hope for the euro and for this behavior by the bulls to be temporary.

Do the bears have prospects at present? In my view, very few. As we have already established, the fundamental backdrop does not support the US dollar. However, we should not forget that not everything in the market depends solely on the fundamental backdrop. In the long term, the market has been in a range for about a year. We have seen three waves upward, and everything suggests that the bulls should continue their advance. However, over the past year, we have seen an alternation of three-wave structures and similar formations. A liquidity sweep of the swing from May 1 could provide a basis for a new bearish part, which would be completely inconsistent with the fundamental backdrop.

Geopolitics is no longer having a favorable effect on the dollar. Negotiations between the United States and Iran have failed once again and are no longer taking place. From time to time, Iran and the United States exchange strikes, threats, and ultimatums, which have no effect whatsoever on resolving the conflict or ending the war. No one can currently predict how much longer the conflict will continue. And the dollar cannot count on market support every time the two sides exchange strikes, which are occurring with notable regularity.

Technical analysis shows that within just a few days, the picture changed from bullish to bearish based on two completely ambiguous events. The euro may stop the pound's decline, but at present, the bears have two imbalances from which positions can be opened. However, the pound's decline could end at any moment if the euro fails to overcome its imbalances. In the euro-pound pair, the euro currency has the higher status.

The economic fundamental backdrop on Friday handed all the cards to the bears. The European retail sales report was weaker than market expectations, while the US unemployment and labor market reports were much stronger than forecasts or in line with them. Paradoxically, the US dollar failed to rise (as of the time of writing). If the market is now refusing to buy the dollar, this means it is not pricing in FOMC monetary policy tightening. In this case, the pound may resume its trend.

The overall fundamental backdrop remains such that, in the long term, I cannot expect anything other than a decline in the US currency. However, this decline appears to be postponed once again for some time. The war between Iran and the United States has not changed my long-term expectations. Geopolitics prompted the market to remember the dollar's safe-haven status for several months, but the conflict has already passed its most active phase. The prospects for FOMC monetary policy tightening remain ambiguous, while the market itself is constantly changing its expectations. Therefore, in my view, any rise in the dollar is temporary and random in nature. I see no reasons for a large-scale advance by the bears.

Economic calendar for the United States and the United Kingdom:

On September 7, the economic calendar contains no noteworthy events. The economic backdrop will have no impact on market sentiment on Monday.

GBP/USD forecast and trading advice:

The long-term picture for the pound remains bullish. After liquidity sweeps of the two latest swings and the formation of a series of buy signals, the bulls may still continue their advance. Unfortunately, the bears have controlled the initiative over the past week, and all the latest bullish patterns have been invalidated. The bears currently have technical grounds for an advance. Only the euro currency can save the pound. The liquidity sweep of the swing from May 1 triggered the decline, and a sell signal formed within the "inverted imbalance" 27. It is difficult to say how long the pound will continue to decline. Two bullish imbalances on EUR/USD could well stop the decline. The fact that the bears did not launch a new attack after the Nonfarm Payrolls report indicates that this report does not change the market's view of the Fed's rate decision in September.