The GBP/USD currency pair also showed a fairly decent drop on Tuesday, but there were a few reasons for this decline. As we have mentioned before, we only expect medium-term declines from the British currency. We believe there can be no other option since the pound has been rising for almost a year, with the last 6–7 months raising many questions about the basis for this growth. Recall that the Fed's interest rate is still higher than the Bank of England's rate, and the state of the British economy is nowhere near that of the United States.
Currently, the market can still indulge in the hope that the British regulator will continue raising the rate until inflation drops to at least 3%. However, simple calculations show that this will not happen anytime soon. For example, the Bank of England expects inflation to decrease to 5% this year. Therefore, it can only slow down to 3% by the middle of next year. If the Bank of England continues to raise the rate by 0.25% at each meeting during this time, the rate will rise to 7-8%. This would be a death sentence for the British economy, and it would take years to recover, all while stimulating the economy, which would, in turn, drive inflation higher.
Thus, the situation at the Bank of England is very unfavorable, and it's not clear how the pound can continue to rise against such a fundamental backdrop. On the 24-hour timeframe, even after yesterday's drop, it cannot be said that the pair has firmly moved below the Ichimoku cloud. The decline in quotes will most likely continue, but for now, it is rather sluggish. The market needs clear signals from the Bank of England about its readiness to continue tightening or, conversely, to end the rate hike cycle. Then the movements will be more volatile.
Huw Pill does not support a rate hike.
As we mentioned earlier, there is very little information coming from the Bank of England, making it very difficult to predict its future actions. However, last week, Chief Economist Huw Pill stated that he considers it more attractive to keep the key rate high for a long time rather than have several more rate hikes followed by a cut. "I think maintaining the rate at around 5.25% is more reasonable because this option carries less risk to financial stability," Mr. Pill said. Note that Pill mentioned a specific rate level to adhere to. This may mean that the rate will not rise above this level, and this level has already been reached.
Thus, there is a possibility that monetary policy tightening in the UK may conclude in September. It may end without another rate hike, or there could be one more. Either way, a single rate hike is unlikely to restore the global upward trend. Recall that the US dollar began to decline last autumn when the first signs of inflation slowing in the US appeared. In other words, the market had already priced in nearly all of the Fed's rate hikes in advance. Such a scenario did not work with the British pound, but now, it is obvious to everyone that the Bank of England is also preparing for a final act.
From our perspective, all of this speaks to one thing: the pound should continue to decline. It may be slow, and uncertain, but in any case, the path is one - to the south. The theoretical possibility of a resumption of the global trend remains, but how much more can the pound grow without clear foundations and reasons?
The average volatility of the GBP/USD pair over the last 5 trading days is 101 points. For the pound/dollar pair, this value is considered "average." Therefore, on Wednesday, September 6th, we expect movement within the range bounded by the levels of 1.2468 and 1.2670. A reversal of the Heiken Ashi indicator upward will signal a phase of upward correction.
The nearest support levels:
S1 – 1.2543
S2 – 1.2512
The nearest resistance levels:
R1 – 1.2573
R2 – 1.2604
R3 – 1.2634
Trading recommendations:
The GBP/USD pair in the 4-hour timeframe has settled back below the moving average and resumed its downward movement. Therefore, at present, it is advisable to remain in short positions with targets at 1.2512 and 1.2468 until the Heiken Ashi indicator reverses upwards. Consideration of long positions will only be possible after the price consolidates above the moving average line with targets at 1.2665 and 1.2695.
Explanations for the illustrations:
Linear regression channels – help determine the current trend. If both are pointing in the same direction, it indicates a strong trend.
The moving average line (settings 20.0, smoothed) – determines the short-term trend and the direction in which trading should currently be conducted.
Murray levels – target levels for movements and corrections.
Volatility levels (red lines) – the likely price channel in which the pair will trade over the next day, based on current volatility indicators.
CCI indicator – its entry into the overbought region (above +250) or oversold region (below -250) indicates that a trend reversal in the opposite direction is approaching.