Long term
The GBP/USD pair has fallen by 180 points this week, which is still not so bad in the current situation. The pair could not retest its previous local low of December 8 at the 38.2% Fibonacci level. Therefore, the British pound declined by just 38.2% after having developed an uptrend in 2020. At the same time, the euro has overcome the Fibo level of 76.4% and is now heading for 100%. Compared to this, the losses of the pound seem to be less significant. On a larger scale, this downward movement is just a short-term correction. Yet, the sterling is still at risk of declining further against the US dollar. Its further trajectory will largely depend on the geopolitical background. GBP is considered a risk asset, so it tends to fall against USD in times of uncertainty. At the same time, the pound/dollar pair has strong support that could keep it from falling deeper. This is the level of 38.2% at 1.3161, from which the price has already rebounded. We have mentioned several times that the pound remains rather strong against the US dollar compared to the euro, for example. This trend is still relevant today. As for the macroeconomic reports, they were mostly downplayed by market participants. The same is true about the fundamental background. The situation in Ukraine is not improving, although there has been less fire in recent days. This can be either a slight de-escalation of the conflict or the calm before the storm. Negotiations between Moscow and Kyiv continue. Let's hope that the two sides will reach an agreement.
COT analysis
The latest COT report on the British pound showed that professional traders became more bullish on the pair. A week earlier, their sentiment was more bearish. In general, the sentiment of major market players is changing too quickly, which is clearly displayed by the two indicators in the picture above. At the moment, the net position of the non-commercial group of traders is close to the zero level which means a neutral sentiment. This is also confirmed by the total data on the number of open contracts. There are currently 51,000 buy contracts and 50,000 sell contracts. As you can see, the difference is minor. Moreover, since July last year, professional traders are struggling to decide on how to trade the pound. In December, the bearish trend strengthened notably, thus leading to a significant fall in the UK currency. The rest of the time, traders are hesitating to choose one direction. Therefore, the fact that the pound has not developed a strong decline partly corresponds to the COT reports. However, we still believe that the COT report is not the best data to base your forecast on. Now, the demand for the US dollar is rapidly rising all over the world. So, it would be wise to expect its further rally regardless of what the COT report is showing. Actually, this is exactly what is happening to the euro now: buy positions on the euro are increasing but the currency is falling nevertheless. So, geopolitical news remains the main focus at the moment.
Fundamental analysis
The economic calendar in the UK was almost empty last week. As expected, three indices of business activity published this time did not cause any reaction in the market. In the US, the economic data was more encouraging. Yet, we cannot say for sure that the pound's fall was attributed to the strong data from the US. At the same time, this could well be the reason. For example, on Wednesday, when Jerome Powell spoke, the pound gained ground right after that. What we can say for sure is that the pound is falling less rapidly against the dollar compared to other majors. This can mean that GBP traders still take into account the macroeconomic and fundamental backgrounds that are not always in favor of USD. At the moment, it is better to refrain from making conclusions based on fundamental factors since market sentiment largely depends on geopolitics. Markets may shortly react to some key reports but this reaction is unlikely to change the prevailing trend.
Trading plan for March 7 - 11:
1) The pound/dollar pair has now resumed the downtrend as it has firmly settled below the Ichimoku Cloud Senkou Span B and the Kijun-sen indicator lines. Now the key level for the pair is 1.3161. Further direction of the pound depends on whether the price will overcome this support or not. If the pair breaks below this level, the pound may continue to fall towards 50.0% Fibonacci at 1.2827. Therefore, selling the pair seems the best option for now.
2) The likelihood of an uptrend has decreased significantly over the past week. First of all, this is confirmed by technical analysis. In its latest round of growth, the pair failed to retest its previous local high. So, it was just a correction, which will be then replaced by the main trend. Accordingly, the fall of the quotes below the previous local low is almost inevitable. Therefore, buying the pair is not relevant now.
Description of indicators:
Support and resistance levels, as well as Fibonacci levels, are the levels that serve as targets when buying or selling the pair. You can place a Take Profit near these levels
Ichimoku Indicators (standard settings), Bollinger Bands (standard settings), MACD(5, 34, 5).
Indicator 1 on the COT chart indicates the size of the net position of each category of traders.
Indicator 2 on the COT chart indicates the size of the net position for the non-commercial group of traders.