The GBP/USD currency pair sharply declined on Tuesday, but it had completely recovered all the losses from Tuesday by Wednesday. However, these movements have little significance for the current technical picture, as they all occur within a sideways channel that has persisted for over a month. For over a month, the pair has been trading between the levels of 1.2610 and 1.2787, and there has yet to be a sign that the price is ready to exit this range.
Within this range, movements can be of any strength and direction. For several days in a row, the pair barely inched upward, sharply dropped by 100 points, and rose even more strongly. There is no logic in the movements within this range, and there cannot be. On Tuesday, there were no signs of trouble for the British currency, but as it turned out later, no trouble occurred because the pound quickly recovered.
A bounce from the lower boundary of the sideways channel would likely trigger an upward move towards the upper boundary. We also warned that movements could be random and unrelated to macroeconomics and fundamentals, which have been virtually absent in recent days. Therefore, after testing the level of 1,2787 (if it happens), the price may return to the level of 1.2610. We see no reason for the British pound to resume its three-month rise, but at the same time, we always remember that the market is not obliged to follow logic, macroeconomics, or fundamentals.
So, now you should either wait for the price to exit the sideways channel or trade at your own risk within it. Fortunately, the British pound's ordeal may soon come to an end. First, a prolonged sideways movement is rare. Second, today is the ECB meeting. Thirdly, next week, the Bank of England and the Fed will have meetings. Of course, the results of these three meetings can be extremely uneventful and disappoint market participants, and the sideways movement may end at any other time. Nevertheless, believing the end of the sideways movement after the central bank meeting is much easier.
Although the ECB meeting is not directly related to the pound, the euro and the pound are closely intertwined. Situations where these two currencies trade differently are very rare. Right now is one of those rare times. A decoupling has occurred, but a reversion is also possible. Today, the pound may mimic the movements of the European currency, if there are any. As mentioned, the ECB meeting results could also be disappointing.
As for the prospects of the British pound, we still believe there is no reason to expect further growth. If Andrew Bailey states next week that we should expect an interest rate cut by the end of the year, the pound may easily break through the level of 1,2787 and continue moving north. But such an outcome is unlikely.
From a technical point of view, the level of 1.2763 in the 24-hour timeframe is very important, and the price has tested it once again. So far, it and its "partner," the level of 1.2787, are preventing the pound from a new, illogical strengthening. Despite our expectation of further declines, the level of 1.2787 could well trigger a new phase of upward movement. One should also be prepared for such a scenario because profit-oriented transactions do not solely drive the forex market.
The average GBP/USD pair volatility for the last five trading days as of January 25th is 70 points. For the pound/dollar pair, this value is considered "average." Therefore, on Thursday, January 25th, we expect movement between 1.2677 and 1.2817. A downward reversal of the Heiken Ashi indicator will indicate a new downward movement phase within the sideways channel.
Key support levels:
S1 – 1.2695
S2 – 1.2665
S3 – 1.2634
Key resistance levels:
R1 – 1.2726
R2 – 1.2756
R3 – 1.2787
Trading recommendations:
The GBP/USD currency pair has once again established itself above the moving average, so it is likely to resume its movement towards the level of 1,2787, which serves as the upper boundary of the sideways channel. However, we must reiterate that the market is currently in a sideways movement, and therefore, movements can be highly random. Moreover, there is the ECB meeting today, which could also impact the GBP/USD pair. We consider it advisable to consider short positions with targets at 1,2634 and 1,2604 near the level of 1,2787, but clear selling signals are needed.
Explanations for the illustrations:
Linear regression channels - help determine the current trend. If both point in the same direction, the trend is strong.
Moving average line (settings 20,0, smoothed) - determines the short-term trend and direction in which trading should be conducted.
Murray levels - target levels for movements and corrections.
Volatility levels (red lines) - the likely price range the pair will trade over the next day based on current volatility indicators.
CCI indicator - its entry into the overbought area (above +250) or oversold area (below -250) indicates an impending trend reversal in the opposite direction.