The GBP/USD pair had been in a near free fall for eleven days, but this week it has made determined attempts to begin a corrective rebound. During the first half of the week, the pound failed to attract traders' attention, and there was little news during those days. However, several important developments supported the pound on Wednesday. It began with a speech by John Williams, who made traders less confident that the Federal Reserve would raise interest rates for a second consecutive time in October. The UK GDP report for the second quarter then showed year-over-year growth of 1.4%, compared with market expectations of 1.2%. This was followed by an important US inflation report that came in below market expectations, partly supporting John Williams' comments. As a result, in just one day, the market almost completely abandoned its expectations of another round of Federal Reserve policy tightening in October. I cannot say that the dollar collapsed, but it began to decline, while the pound rose. Unfortunately, bullish traders have now retreated again, and they will face a difficult task within Imbalance 30 in the near term. This pattern is bearish and needs to be invalidated if the bulls are aiming for more than a corrective rebound. The Nonfarm Payrolls report or Friday's unemployment report could help them achieve this.
I would also note that traders continue to expect the Bank of England to implement the same two monetary policy tightenings as the Federal Reserve. Moreover, as I have noted before, the dot plot actually points to only one policy tightening. Thus, the Bank of England could ultimately tighten policy even more than the Federal Reserve, which clearly does not support further gains in the US currency.
Despite the unfavorable picture for the British pound that has developed in recent weeks, the dollar has also faced a number of negative factors in recent months. If the Federal Reserve had not decided to raise interest rates in September and indicated its willingness to tighten policy at least once more before the end of the year, I would still expect the US currency to decline. I still expect this, but from lower levels. However, the bulls' chances now depend only on a liquidity sweep of the low from July 28 or June 24, as well as the formation of new bullish patterns, which would require a sustained upward move. The chart clearly shows that most reversals over the past year occurred after liquidity sweeps, so in my view, this represents a good opportunity. The bears, meanwhile, have Imbalances 29 and 30 at their disposal. Particular attention should be paid to the latter, as it has already been largely worked through. This means that a new sell signal could form in the coming days.
Do the bears have further potential? In my view, there is little, but it must be acknowledged that the dollar remains in a favorable period. The Federal Reserve not only decided to raise interest rates but also communicated its willingness to continue tightening this week. I do not believe that a prolonged decline in GBP/USD can be based on this factor alone, but in recent weeks the market has done little else but price in further FOMC rate hikes. What could prevent it from continuing to buy the dollar for several more weeks amid Federal Reserve monetary policy tightening?
The technical analysis shows that the picture became fully bearish after the liquidity sweep of the May highs. The pound reacted to Bearish Imbalance 27, which triggered a 320-point decline in the pair. The decline was initially targeted at Imbalance 25, and this pattern was both worked through and broken. New bearish imbalances 29 and 30 have also formed, supporting the bears.
The economic news background on Thursday was of no significance to traders. For most of the day, the bears retreated again, although there were no apparent reasons for this. However, if this had happened only once, it could have been attributed to chance. Over the past three to four weeks, however, a similar pattern has occurred regularly.
The overall fundamental background remains such that, in the long term, I cannot expect anything other than a decline in the US currency. The war between Iran and the United States has not changed my expectations. Geopolitical developments prompted the market to focus on the dollar's safe-haven status for several months, but the conflict has already passed its most acute phase. The future course of FOMC monetary policy remains uncertain, while the market continues to focus only on further tightening, which is the main reason for the bears' positive outlook. In my view, any rise in the dollar is temporary and driven by short-term factors. I would also note that GBP/USD has been trading in a range for an entire year. A range allows for expectations of almost any price movement within its boundaries.
US and UK Economic Calendar:
- United States – Nonfarm Payrolls change (12:30 UTC).
- United States – Unemployment rate (12:30 UTC).
- United States – Change in average earnings (12:30 UTC).
The economic calendar for October 2 contains three entries, at least two of which are very important. The economic data will influence market sentiment in the second half of Friday's trading session.
GBP/USD Forecast and Trading Tips:
The long-term outlook for the pound remains bullish. The bears have controlled the market in recent weeks, but overall, the range is visible even on the daily chart. The liquidity sweep of the swing low from May 1 triggered a new decline, while the sell signal within Inverted Imbalance 27 allowed the decline to continue. Thus, the pound remains in a near free fall, which could continue toward the June lows. A liquidity sweep of those lows could then be followed by a reversal in favor of the pound. However, this week, the price may react to Bearish Imbalance 30.
