What is needed to open long positions on GBP/USD
In the morning article, I expanded on the importance of 1.2124 and recommended making trading decisions with this level in focus. Now let's analyze the 5-minute chart and try to figure out what has actually happened. GBP/s spike in the first half of the day enables a false breakout at 1.2124. This opened the door for a strong down move of more than 40 pips. The technical picture remained the same.
The UK GDP data perfectly coincided with the consensus on a quarterly basis. A decline on month was lower than expected which triggered a massive sell-off of the sterling in the first half of the day, not allowing the bulls to climb above 1.2124. During the American session, there is nothing that could help the buyers of the pound, as the data on the consumer sentiment index from the University of Michigan and inflation expectations will certainly help the dollar strengthen even more. If the pair falls, I plan to observe the activity of buyers only after the formation of a false breakdown at 1.2060 - a new support level formed on the basis of yesterday. This will allow traders to bet the GBP's advance back to the level of 1.2124.
Only in case GBP/USD consolidates and tests this range from top to bottom in light of weak economic reports on the US, I will bet on a further rise of the GBP/USD to a high of 1.2186. Exit above this range will also open prospects for growth to 1.2239, where traders will take profits. If the bulls fail to meet their targets and miss 1.2060 in the afternoon, then GBP/USD will come again under selling pressure. In this case, I advise you not to rush to buy and open long positions only near the next support at 1.2011 and only on the condition of a false breakout. I will buy GBP/USD immediately on a rebound only from 1.1964, bearing in mind a 30-35-pips intraday correction.
What is needed to open short positions on GBP/USD
A false break in the area of the nearest resistance 1.2124 already produced an excellent sell signal in the morning, so I will bet on this level in the afternoon as well. Another unsuccessful consolidation forms an entry point into short positions as we expect a large movement of GBP/USD to the 1.2060 area, which we did not see during the European session. If the Fed sticks to the hawkish rhetoric, I expect a breakout and reverse test of 1.2060 from bottom to top, which will negate all buyers' plans for a quick return after yesterday's sell-off, increasing the presence of the bears in the market and forming a sell signal already with a fall to 1.2011. The lowest target will be the area of 1.1964, the update of which will indicate the extension of a downtrend. There I will take profits. With GBP/USD rising and no bears at 1.2124 in the afternoon, the bulls will feel the strength again. In this case, only a false break in the area of the next resistance at 1.2186 forms an entry point to short positions. In the absence of activity there, I will sell GBP/USD immediately from the high of 1.2239, but only counting on the pair's drop down by 30-35 points intraday.
The January 24 COT (Commitment of Traders) report showed a sharp decline in both long and short positions. However, the current contraction has been within acceptable limits, especially as the UK government is currently struggling with strikes and demands for higher wages. Besides, at the same time, the UK authorities are trying to achieve a steady reduction in inflation.
All this will have a positive effect on the British pound, so I will bet on its further strengthening, unless, of course, anything extraordinary happens. The latest COT report indicated that short non-commercial positions decreased by 7,476 to 58,690, while long non-commercial positions decreased by 6,713 to 34,756, leading to a decline in the negative non-commercial net position to -23,934 against -24,697 a week earlier. Minor changes like this don't have much of an impact on the balance of trading forces, so we'll continue to keep a close eye on UK economic performance and the Bank of England's decision. GBP/USD closed last week higher at 1.2350 against 1.2290 in the previous week.
Indicators' signals:
The currency pair is trading at about the 30 and 50 daily moving averages. It indicates market uncertainty about GBP/USD.
Moving averages
Note: The period and levels of moving averages are considered by the author on the 1-hour chart and differ from the general definition of the classic daily moving averages on the daily chart.
Bollinger Bands
If GBP/USD goes down, the indicator's lower border at 1.2095 will serve as support.
Description of indicators
Moving average (moving average, determines the current trend by smoothing out volatility and noise). Period 50. It is marked yellow on the chart. Moving average (moving average, determines the current trend by smoothing out volatility and noise). Period 30. It is marked green on the chart. MACD indicator (Moving Average Convergence/Divergence — convergence/divergence of moving averages) Quick EMA period 12. Slow EMA period to 26. SMA period 9 Bollinger Bands (Bollinger Bands). Period 20 Non-commercial speculative traders, such as individual traders, hedge funds, and large institutions that use the futures market for speculative purposes and meet certain requirements. Long non-commercial positions represent the total long open position of non-commercial traders. Short non-commercial positions represent the total short open position of non-commercial traders. Total non-commercial net position is the difference between short and long positions of non-commercial traders.