FX.co ★ GBP/USD: Plan for European session on July 25, 2023. Commitment of Traders COT report (analysis of yesterday's trades). Pound sterling remains within channel after sizeable correction

Yesterday, several excellent market entry signals were formed. Let us take a look at the 5-minute chart and analyze what happened. In my morning forecast, I highlighted the 1.2857 level and recommended making market entry decisions with this level in mind. The breakout and an upward retest of this level produced a sell signal, which, together with the weak PMI data, sent the pound down to 1.2805. A false breakout at 1.2817 then formed a buy signal, which resulted in GBP/USD rising by 25 pips. A sell-off after an unsuccessful consolidation at 1.2857 in the afternoon resulted pushed the pair down by more than 50 pips, but by the middle of the US session, bulls took over and defended 1.2809, which led to an upward correction of about 30 pips.

When to open long positions on GBP/USD:

Before analyzing the technical picture of the pound, let us take a look at what happened in the futures market. According to the COT report (Commitment of Traders) for July 18th, there was a significant increase in both long and short positions. Traders started returning to the market after the release of several fundamental data releases, indicating the UK economy is in a somewhat stable state, which is gradually sagging under the pressure of high interest rates. The sharp decline in inflation in the US prompted a GBP upsurge. However, its overbought state, coupled with the central bank's hawkish policies, raises concerns about future labor and housing market problems in the UK. Bearish are taking advantage of this by increasing their short positions at any opportune moment, as evident from the COT report. Recent PMI reports also point to growing issues. This week, the Federal Reserve will hold its policy meeting, and if there's an announcement about concluding the cycle of interest rate hikes, the pound sterling may rise again. Buying the pound on dips remains the optimal strategy. According to the latest COT report, non-commercial long positions increased by 23,602 to 135,269, while non-commercial short positions jumped by 17,936 to 71,540. This led to another upward surge in the non-commercial net position, which reached 63,729 compared to 58,063 the previous week. The weekly price rose to 1.3049 from 1.2932.

Today there are practically no data from the UK except for the CBI Industrial Order Expectations report, which is unlikely to change the balance of forces in the market. For this reason, I expect the pair to remain within the sideways channel, and bulls will try to regain control of the middle of the channel. However, I will prefer to act on the decline near the nearest support at 1.2809, formed at yesterday's session. This will create an excellent entry point, with the upside target at the resistance level of 1.2857. Just below this range are the moving averages, which favor the bears. A breakout and a downward retest of this range are very important today. It will form an additional buy signal and will reinforce the pound sterling, allowing it to reach a new high of 1.2901. Without reaching that level, it will be difficult for GBP/USD bulls to expect further growth. If the pair goes above this range, it might break towards 1.2960, where I will take profits. If GBP/USD falls and there are no bulls at 1.2809, the bear market will continue to develop, and the pound will perform badly. If that happens, I will postpone opening long positions until it reaches 1.2754. Positions should be opened there only on a false breakdown. It is possible to open long positions on GBP/USD immediately if it rebounds off 1.2717 targeting a correction of 30-35 pips intraday.

When to open short positions on GBP/USD:

Bearish traders did their best yesterday, thanks to the weak UK statistic data. Now it is very important for them to keep the pair below the middle point of the sideways channel at 1.2857, which will keep the pressure on GBP/USD and provide a chance to hit the weekly low. A false breakout of 1.2857 will form a sell signal and potentially send the pair down to the support at 1.2809, which was formed yesterday. A breakout and an upward retest of this range will create an entry point for short positions with a target of 1.2754. A more distant target will be the low of 1.2717, where I will take profits. If GBP/USD grows and bears are idle at 1.2857, nothing terrible will happen for the sellers, but they will still waste some of their initiative. In this case, only a false breakout near the upper boundary of the sideways channel at 1.2901 will form an entry point for short positions expecting the pound to move down. If there is no activity there as well, I advise selling GBP/USD immediately if it bounces off 1.2960, targeting a downward correction by 30-35 pips intraday.

Indicator signals:

Moving Averages

Trading is carried out below the 30-day and 50-day moving averages, indicating that GBP/USD is likely to decline further.

Note: The author considers the period and prices of the moving averages on the 1-hour chart (H1), which differ from the standard definition of classical daily moving averages on the daily chart (D1).

Bollinger Bands

If the pair increases, the upper boundary of the indicator around 1.2850 will act as resistance. If GBP/USD declines, the lower boundary of the indicator around 1.2809 will provide 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 the short and long positions of non-commercial traders.