Long-term perspective.
The GBP/USD currency pair has fallen 230 points during the current week. The pound is currently continuing to fall almost non-stop. Although global factors remain not in favor of the British currency, the pound has lost almost 8 cents against the dollar in the last 17 trading days alone. This is a lot from our point of view, given that the euro currency has been standing still in recent weeks. On the other hand, what should be surprising here? We have a clear, long-term downward trend, and most factors remain in favor of the US dollar, so why should a strong downward movement be surprising? We are just used to the fact that the pair often shows movement in one direction or another based on specific reports or events. However, now the market is in a bearish mood, and its participants do not need daily reasons to sell the pound.
Moreover, such one-way movement is very good for traders since it has always been easier and more profitable to trade on a trend than on a flat or a "swing." Therefore, we would not ask ourselves why the pound is racing at full steam to its 37-year lows, from which only 100 points remain. Do you remember a couple of weeks ago, we said that 400-500 points down for the pound was a matter of one or two weeks? Now there is little doubt that these minimums will be updated. Accordingly, we can count on 200–300 points of movement to the South. There were practically no important or interesting events in the UK this week. The only report was the index of business activity in the manufacturing sector for August, which did not arouse any interest among market participants. And what reaction could you expect from the market if it just sold the pound all week? Even Friday's Nonfarm, to which the euro reacted with multidirectional movements, did not stop the pair's fall.
COT analysis.
The latest COT report on the British pound, released yesterday, turned out to be as neutral as possible. During the week, the non-commercial group closed 0.3 thousand buy contracts and opened 0.9 thousand sell contracts. Thus, the net position of non-commercial traders increased by 1.2 thousand at once. The net position indicator has been growing for several months. However, the mood of major players remains "pronounced bearish," which is seen by the second indicator in the illustration above (purple bars below zero = "bearish" mood). Therefore, the British pound still cannot count on growth. How can you count on it if the market sells the pound more than it buys it? And now, its decline has resumed altogether, so the "bearish" mood of the major players in the near future can only intensify. The non-commercial group has opened 87 thousand sales contracts and 58 thousand purchase contracts. The difference is not as frightening as it was a few months ago, but it is still tangible. Net positions will have to grow for a long time for these figures to at least level up.
Moreover, COT reports reflect the moods of major players, and the "foundation" and geopolitics affect their moods. If they remain as weak as they are now, the pound may be at a "downward peak" for some time. It should also be recalled that it is not only the demand for the pound that matters but also the demand for the dollar, which remains very high. Therefore, even if the demand for the British currency grows, if the demand for the dollar grows faster, then we will not see a strengthening of the pound.
Analysis of fundamental events.
This week, there was an important ISM index in the US, but it was important only for its "poster." In practice, it turned out that its value did not differ from the value of the previous month, and traders were too busy selling the pound to pay attention to some business activity index. On Friday, the Nonfarm Payrolls report was released, which showed the creation of 315 thousand new jobs outside the agricultural sector. Since the forecast was 300-310 thousand, the report's value can be considered neutral. But the unemployment rate rose from 3.5% to 3.7%. Jerome Powell and some members of the Fed monetary committee warned that unemployment could start to rise due to aggressive monetary policy, and now we see that this process has begun. However, this report did not convince traders of the expediency of continuing to buy the dollar.
Trading plan for the week of September 5 – 9:
1) The pound/dollar pair as a whole maintains a long-term downward trend and is located below the critical line. Above the Ichimoku cloud, she failed to gain a foothold, so everything suggests that the downward movement of the pair will continue for some time. Therefore, the pair's purchases are not relevant now.
2) The pound continues to be near its 2-year and 37-year lows and may update them many more times in 2022. Since the pair has returned to the area below the critical line, the southward movement may continue with a target of 1.1410 (100.0% Fibonacci). Overcoming this level can send the pound into free fall.
Explanations of the illustrations:
Price levels of support and resistance (resistance /support), Fibonacci levels – levels that are targets when opening purchases or sales. Take Profit levels can be placed near them.
Ichimoku indicators (standard settings), Bollinger Bands (standard settings), MACD (5, 34, 5).
Indicator 1 on the COT charts is the net position size of each category of traders.
Indicator 2 on the COT charts is the net position size for the "Non-commercial" group.