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On Tuesday, GBP/USD was in a downtrend. Volatility was low. The 30-day volatility of GBP/USD totals 89 pips and is considered moderate. It gets harder every day to trade the instrument due to small price fluctuations. Yesterday's macro data in the UK exerted pressure on the pair. The services PMI again decreased. Meanwhile, in the US, the manufacturing PMI fell below 50.
In the course of the day, the price showed some ups and downs but remained below the moving average. We expected a bearish continuation due to an unjustifiably high price of the pound. However, the CCI has hinted at the possibility of a bullish correction in recent days. It may also signal that an uptrend is impending. Two bullish divergencies have already formed, and the price has entered an overbought zone. Therefore, it would be wiser to trade cautiously. Traders are selling the pound reluctantly. Perhaps they are awaiting today's inflation report.
Yesterday, several BoE officials testified in the Parliament, namely Governor Bailey, Silvana Tenreiro, and Huw Pill. Tenreiro's and Pill's speech was of little interest. Meanwhile, Bailey's remarks were quite interesting. He refrained from giving a clear answer to the question about rate hikes but said the peak might be nearing. He also mentioned certain risks surrounding high inflation and noted that the regulator expected consumer prices to go down since April. He believes the peak of inflation is over and it will be slowing from now on. The regulator will hike rates if needed depending on coming inflation results. Bailey also stressed that if inflation showed signs of a slowdown, the bank would consider additional tightening measures.
All in all, the BoE maintains a moderatelyb hawkish stance on interest rates. We believe his words mean that rates will not be raised higher than the market now expects. As a reminder, rates may be hiked twice more by 0.25%. Bailey also stressed that the unemployment growth is slower than expected, and the British economy shows signs of resilience. Therefore, the situation is now better than several months ago. However, taking into account a strong and unjustifiable increase in GBP over the past 2.5 months, the uptrend will hardly resume any time soon. Rather, it will stay overbought.
In the 24-hour time frame, a fall will likely extend to the Senkou Span B line, located near 1.2200, that is by some 200 pips. Further, it remains to be seen whether the price breaks through the Ichimoku cloud. Quotes may drop to the 38.2% Fibonacci level of 1.1844 on the daily chart.
On May 24, the 5-day average volatility of GBP/USD is 83 pips and is evaluated as moderate. On Wednesday, the pair will likely move in a channel limited by the 1.2335 and 1.2501 levels. Heiken Ashi's upward reversal will signal a correction.
Support:
S1 – 1.2390
S2 – 1.2329
S3 – 1.2268
Resistance:
R1 – 1.2451
R2 – 1.2512
R3 – 1.2573
Outlook:
In the 4-hour time frame, GBP/USD resumed the fall. We will sell with targets at 1.2390 and 1.2335 before consolidation above the MA. We will consider buying after consolidation above the MA, targeting 1.2501 and 1.2573.
Indicators on charts:
Linear Regression Channels help identify the current trend. If both channels move in the same direction, a trend is strong.
Moving Average (20-day, smoothed) defines the short-term and current trends.
Murray levels are target levels for trends and corrections.
Volatility levels (red lines) reflect a possible price channel the pair is likely to trade in within the day based on the current volatility indicators.
CCI indicator. When the indicator is in the oversold zone (below 250) or in the overbought area (above 250), it means that a trend reversal is likely to occur soon.
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