05.10.202308:27 Forex Analysis & Reviews: Overview of the GBP/USD pair. October 5th. Andrew Bailey: Negativity or excessive optimism

The GBP/USD currency pair also started a new phase of correction on Wednesday and retested the moving average line. A bounce from this line may trigger a resumption of the downward trend that has been ongoing for two months. On the other hand, a consolidation above the moving average may signal to traders the long-awaited upward correction, which we have been waiting for for over a week. However, caution is advised: a consolidation above the moving average can be false, as has been the case several times in the past.

The British pound still appears very weak from a fundamental and macroeconomic perspective. British statistics continue to disappoint more often than not. While the Bank of England's interest rate has risen to the level of the Federal Reserve's rate, this factor has long been priced into the market, so expecting a new rise in the British currency based on the high BOE rate is unlikely. Inflation in the UK remains high, and whether it will drop to 5% by the end of the year, as promised by Andrew Bailey, is a big question. However, at the same time, the pound has fallen by 1000 points over the last two months, so further decline is not so obvious. The nearest target in the 24-hour timeframe is the Fibonacci level of 38.2% (1.1844). Given that there are only 300 points required to reach this level, it is achievable by the end of the year. It is currently hard to believe in a further significant decline of the pound because it raises questions about the reasons behind such a steep fall.

By the end of the year, we can expect both central banks to provide information on when they plan to begin easing monetary policy. As soon as this information is provided, the currency of the central bank that hints at easing first may start to depreciate. We believe it could be the dollar, as inflation in the United States is much lower, and it may return to 2% much faster than the British pound. Therefore, the Fed may have more reasons to start reducing the key interest rate sooner.

Andrew Bailey expects new shocks. The head of the Bank of England, who rarely speaks in public, gave an interview and comments on Wednesday, stating that the regulator does not intend to change the target inflation rate. Such a statement could only be made in light of the high inflation rate at the moment. In other words, for example, there might have been a question about whether the 2% inflation rate is unattainable, leading to a need to raise it. Andrew Bailey answered this question, but for the Bank of England and the British pound, this report no longer holds any significance. Previously, it could have been interpreted as a new hawkish hint. Now, it is clear to everyone that the Bank of England is transitioning to a policy of maintaining a high interest rate to combat inflation. So whether they change the target rate or not, the rate will not rise, and therefore, there are not many reasons for the British currency to appreciate.

Mr. Bailey also stated that he expects new shocks. However, he did not specify what kind of shocks he expected. It is likely that he is referring to inflation risks because what other issues are currently concerning central banks and their leadership? The fact is that as the cold season approaches, demand for gas and oil will increase, and along with it, the cost of all energy sources may start to rise. Oil prices are already rising, and the higher fuel prices go, the more prices for all categories of goods and services rise because transportation costs, heating, and electricity are factored into virtually any price. By the way, we are already seeing inflation in the United States. Therefore, another surge in inflation in Britain cannot be ruled out.

The average volatility of the GBP/USD pair over the last 5 trading days is 105 points. For the pound/dollar pair, this value is considered "average." As a result, on Thursday, October 5, we anticipate movement that stays within the range defined by the levels of 1.2052 and 1.2262. A reversal of the Heiken Ashi indicator downward will signal a resumption of the downward movement.

Nearest support levels:

S1 – 1.2146

S2 – 1.2085

S3 – 1.2024

Nearest resistance levels:

R1 – 1.2207

R2 – 1.2268

R3 – 1.2329

Trading Recommendations:

On the 4-hour timeframe, the GBP/USD pair has started a new phase of correction. Therefore, at the moment, new short positions can be considered with targets at 1.2085 and 1.2052 in case of a price bounce from the moving average. Long positions can be taken only after the price consolidates above the moving average line, with targets at 1.2207 and 1.2268.

Explanations for the illustrations:

Linear regression channels - help determine the current trend. If both channels are pointing in the same direction, it indicates a strong trend.

Moving average line (settings 20.0, smoothed) - determines the short-term trend and the direction in which trading should be conducted.

Murray levels - target levels for movements and corrections.

Volatility levels (red lines) - the likely price channel in which the pair will trade in the next 24 hours, based on current volatility indicators.

CCI indicator - its entry into the overbought zone (above +250) or oversold zone (below -250) indicates an approaching trend reversal in the opposite direction.