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The GBP/USD currency pair experienced a decline on Monday, which we had anticipated. Over the weekend and on Monday, we pointed out that there was no solid fundamental reason for the 100-pip increase of the British pound on Friday. We expected the price to continue its downward trend on Monday, especially as new fundamental factors emerged last week that would likely put pressure on the pound sterling. It has become evident that the Federal Reserve may only reduce interest rates two times in 2025. Furthermore, some experts and members of the Fed's monetary committee believe that even a single rate cut might be sufficient. It's worth noting that the market had previously priced in 6 or 7 rate cuts of 0.25% each for 2024. We should remind readers that the market had anticipated a complete cycle of monetary easing in the U.S. However, it now appears that the Fed will proceed with easing at a much slower pace.
Throughout 2024, we consistently highlighted the strength of the U.S. economy. While everyone is entitled to their opinion, it is essential for us to accurately evaluate the fundamental and macroeconomic landscape in order to make reliable forecasts. The U.S. economy is significantly stronger than those of the Eurozone and Britain. This strength allows the Fed the flexibility to wait indefinitely for inflation to return to its target level, a luxury that the Bank of England and the European Central Bank do not have. Moreover, the inherent strength of the U.S. economy makes the dollar a more attractive currency for purchases. However, the dollar experienced a decline for two years during a persistent bearish trend. Now, as global bearish trends begin to reverse, nearly all indicators suggest a strong and prolonged rise for the dollar, which has been evident throughout 2024.
The BoE warrants attention for two main reasons. First, the stance of its monetary committee turned out to be more dovish than anticipated at its most recent meeting. Second, the Bank's current sluggish pace indicates that it may eventually need to act rapidly. Sooner or later, whether gradually or swiftly, the Bank is likely to lower its key interest rate. Given the state of the economy, it seems unlikely that the Bank can maintain a "neutral rate" of around 4%, as the Fed does. As a result, we continue to forecast the pound sterling to hover near the 1.1800 level, a target we've mentioned since the beginning of the year. If the global bearish trend continues, the pound could potentially drop to parity with the dollar in the next few years. Although this scenario seems difficult to envision, past events, such as the oil price shock and negative crude valuations from a few years ago, have demonstrated that anything is possible. This week alone, the pound could decline to the 1.2300 level.
The average volatility of the GBP/USD pair over the past five trading days is 121 pips, which is considered "high" for this pair. On Tuesday, December 24, we expect the price to move within a range defined by the levels of 1.2394 and 1.2636. The higher linear regression channel is trending downward, indicating a bearish trend. Although the CCI has recently entered the oversold zone again, the pound still appears poised to continue its downward trend, as we have previously indicated. Any oversold condition in a bearish trend is typically just a signal for a correction. Additionally, the bullish divergence noted in this indicator suggests a potential for correction.
The GBP/USD pair is currently in a bearish trend, although it is experiencing some corrections. We advise against taking long positions at this time, as we believe that the market has already fully accounted for all potential growth factors affecting the British currency. However, if you are trading based on technical analysis, long positions could be considered with a target of 1.2817, provided the price is above the moving average line. At present, short positions are more relevant, with targets set at 1.2451 and 1.2394.
Linear Regression Channels help determine the current trend. If both channels are aligned, it indicates a strong trend.
Moving Average Line (settings: 20,0, smoothed) defines the short-term trend and guides the trading direction.
Murray Levels act as target levels for movements and corrections.
Volatility Levels (red lines) represent the likely price range for the pair over the next 24 hours based on current volatility readings.
CCI Indicator: If it enters the oversold region (below -250) or overbought region (above +250), it signals an impending trend reversal in the opposite direction.
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