GBP/USD: plan for the American session on January 31 (analysis of morning deals). Pound rises ahead of Bank of England monetary policy meeting

To open long positions on GBP/USD, you need:

Earlier, I pointed out the 1.3430 level and recommended making entry decisions from it. Let's take a look at the 5-minute chart. With the bears gradually leaving the market ahead of the Bank of England meeting, the bulls managed to get a breakdown of 1.3430 in the first half of the day and then to defend this level, which led to a buy signal for the pound. The pair is up almost 15 pips but has yet to reach the target of 1.3466. From a technical point of view there are small changes to base your decisions on.

During the US session, the Chicago PMI will be released. In addition, FOMC member Esther George will give a speech. If the data is worse than economists' forecasts, it could cause GBP/USD to rise further.

In case of renewed pressure on the pair and a slight decline after the report, it is very important in the afternoon to defend the support level of 1.3418, just below which the moving averages pass. With another false break at 1.3418, the buyers will prove their presence in the market to continue the correction of the pound. A breakdown of 1.3466 is no less important. A top-down test of this level will provide an additional entry point with a return target to 1.3519. A more challenging task will be a break above 1.3565. However, this will be closer to the time of the interest rate hike by the Bank of England in the second half of this week. I recommend taking profits there.

With decrease of GBP/USD during American session and absence of activity at 1.3418 it is better not to buy risky assets. I recommend to wait for the break of level 1.3380, which is the last hope of bulls for growth of pound, and only there at formation of a false breakdown to open long positions on an entrance in the market. You may buy the pound immediately on a pullback from 1.3342 or from the low of 1.3301, counting on an intraday correction of 20-25 pips.

To open short positions on GBP/USD, you need:

Sellers are not in a hurry to enter the market and press on the pound yet, as they are understandably wary of the decisions that the Bank of England might make this week. Having missed the morning resistance at 1.3440, the priority now is to protect 1.3466. Only the formation of a false breakdown there and strong Chicago PMI statistics will form an entry point into short positions followed by a decline in the pair towards 1.3418. A breakdown and a test of this area from the bottom up will give an additional entry point into short positions in anticipation of GBP/USD declines already to 1.3380 and 1.3342, where I recommend to take profits.

In case the pair rises during the US session and sellers are weak at 1.3466, it is best to postpone selling until the next major resistance, 1.3519. I also advise to open short positions there only in case of a false breakdown. To sell GBP/USD immediately on a rebound is possible from 1.3565, or even higher - from the high of this month in the area of 1.3612, counting on a pair bounce down by 20-25 pips during the day.

The COT report (Commitment of Traders) for January 18 shows an increase in long positions and a decrease in short positions, indicating that the pound continues to be attractive after the Bank of England raised interest rates at the end of last year. Expectations that the regulator might raise interest rates again by 0.25 points at its next meeting have increased quite considerably. This would only strengthen the pound's position. However, the fundamental picture creates a number of more serious issues that limit the upside potential. Above all, it is about inflation, which is destroying all that the UK labor market has to offer at the moment. Despite high wages and falling unemployment, high inflation leaves nothing of household income, and high energy and other service prices make their welfare even lower than it was during the coronavirus pandemic. Looking at the bigger picture, the outlook for the British pound looks quite good, and the current downward correction makes it more attractive. Either way, the Bank of England's decision to raise interest rates further this year will push the pound to new highs. Notably, everyone is waiting this week for the outcome of the Open Market Committee meeting on monetary policy. Some traders expect that the US Central Bank may decide to raise interest rates already during the January meeting, without delaying the issue until March. A Fed balance sheet reduction will also be announced. The COT report for January 18 indicated that long non-commercial positions increased from 30,506 to 39,760, while short non-commercial decreased from 59,672 to 40,007. This led to a change in the negative non-commercial net position from -29,166 to -247. The weekly closing price rose from 1.3579 to 1.3647.

Signals of indicators:

Moving averages

Trading is conducted above 30 and 50 daily moving averages, which indicates an attempt by buyers to the pound's correction.

Note: The period and prices of moving averages are considered by the author on the hourly chart H1 and differ from the general definition of the classic daily moving averages on the daily chart D1.

Bollinger Bands

In the case of a decline, the lower limit of the indicator in the area of 1.3380 will act as support.

Description of indicators