26.05.202114:55 Forex Analysis & Reviews: GBP/USD: trading plan for American session on May 26 (overview of morning trade). Sellers eager to defend resistance at 1.4168 anticipating further downward correction

What is needed to open long positions on GBP/USD

In the morning article, I recommended opening short positions from 1.4168 in anticipation of a further downward correction in the near time. Now let's discuss a 5-minute chart and what has happened since then. The chart clearly shows that the bulls tried to climb above resistance of 1.4168 in the first half of the day, but their efforts were in vain. A fake breakout in that area was followed by a signal to open short positions. As a result, the sellers regained control over the market. The price moved nearly 40 pips downwards. The currency pair rebounded until the early American session. Nevertheless, the bears resumed activity at around 1.4168 that eventually generated a signal for short positions. We will see what will actually happen later today.

The technical picture didn't change in the first half of the day, so the trading scenario for the American session remains the same. The economic calendar lacks any macroeconomic data from the UK. Thus, the pound sterling is set to be under pressure. The bulls' aim for the New York session is to break 1.4168. Long positions could be opened only on condition this level is tested and broken downwards. Such a move will generate a signal for long positions following the overall uptrend with the nearest target of 1.4209, a one-month high, where I recommend profit taking. A more distant target is seen at 1.4253. In case GBP/USD climbs above 1.4253, the pair will face the next major resistance at near 1.4310. If the sterling declines in the second half of the day, the bulls should assert strength at about 1.4118.

A fake breakout there will create an excellent market entry point inside the overall bullish trend. If the buyers don't reveal any activity there, the sterling could come under pressure again and the bears could carry on building a new downward channel. In this case, I would advise against hasty long positions. The best idea would be to open long positions at a bounce off a major low of 1.4041, bearing in mind an upward 250-30 pips correction intraday.

What is needed to open short positions on GBP/USD

In the first half of the day, the sellers coped well with the task of defending resistance of 1.4168. As long as the currency pair is trading below this level, the bears are holding the upper hand. The task for the bears during the American session is to regain control over support at 1.4118. They have not been able to push the price deeper since May 24. Perhaps, the third test of this level will eventually break it and the price will be able to fix below it. The test of 1.4118 in the opposite direction upwards will suggest a good market entry point with short positions as GBP/USD could decline back to 1.4041 where I recommend profit taking. A more distant target is seen at 1.3982. If the sterling perks up in the second half of the day, the bears will have to defend resistance at 1.4168. Only on condition of a fake breakout there, we could find out a market entry point with short positions. If the sellers subdue their activity in that area, it would be better to cancel short positions until the price hits a higher high at around 1.4209. Besides, short positions could be opened immediately at a drop off new resistance of 1.4253, bearing in mind a downward 20-25 pips correction intraday.

Let me remind you that the COT report (Commitment of Traders) from May 18 logged contraction of long positions and a modest increase of short positions. Moderate inflation in the UK assures the BoE Monetary Policy Committee to stick to ultra-soft policy which determines a trajectory of the pound sterling. The Kingdom has won the battle with COVID-19. Currently, the Britons are recalling the pandemic as a nightmare. Notably, the UK economy is reopening in full starting from the summer. This is likely to give a fresh impetus for retail sales and consumer inflation. This is certainly bullish for the sterling. So, the next rally is just a question of time. Don't be surprised to see steep falls of GBP/USD. The pair is going to challenge the bottom and attract large buyers.

Recently, fundamental data is of little importance for a trajectory of GBP/USD. That's way let me recommend you shifting focus towards speeches by Bank of England Governor Andrew Bailey and his colleagues.

Referring to the COT report, long non-commercial positions decreased from 64,947 to 63,027. The thing is that it looks more like profit taking than giving up long positions because of a change in market sentiment. At the same time, short non-commercial grew to 38,127 from 36,771. As a result, non-commercial net positions declined to 24,900 from 28,176 from a week ago. GBP/USD closed at 1.41479 last week, almost at a similar price, against 1.41308 in the previous week.

Signals of technical indicators

Moving averages

The pair is trading at nearly 30- and 50-period moving averages. It confirms the range-bound market after a failed attempt of the bulls to climb above 1.4168.

Remark. The author is analyzing a period and prices of moving averages on the 1-hour chart. So, it differs from the common definition of classic daily moving averages on the daily chart.

Bollinger Bands

In case the currency pair breaks the upper border at near 1.4168, this will trigger a new bullish wave of GBP. Alternatively, a breakout of the lower border at about 1.4140 will intensify selling pressure on GBP.

Definitions of technical indicators

• Moving average recognizes an ongoing trend through leveling out volatility and market noise. A 50-period moving average is plotted yellow on the chart.
• Moving average identifies an ongoing trend through leveling out volatility and market noise. A 30-period moving average is displayed as the green line.
• MACD indicator represents a relationship between two moving averages that is a ratio of Moving Average Convergence/Divergence. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. A 9-day EMA of the MACD called the "signal line".
• Bollinger Bands is a momentum indicator. The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average.
• Non-commercial traders - speculators such as retail traders, hedge funds and large institutions who use the futures market for speculative purposes and meet certain requirements.
• Non-commercial long positions represent the total long open position of non-commercial traders.
• Non-commercial short positions represent the total short open position of non-commercial traders.
• The overall non-commercial net position balance is the difference between short and long positions of non-commercial traders.