FX.co ★ Outlook for GBP/USD on January 2. The uptrend remains intact

Analysis of GBP/USD 5M

GBP/USD exhibited quite chaotic movements during the last trading day of the previous week, month, and year. The price constantly changed direction, but at the end of the day, it stayed above the trendline that has suggested an uptrend for the past couple of months. Therefore, the pair could resume its upward movement as early as Tuesday. However, at the same time, the euro has settled below the trendline, indicating a good chance for a downward move. Take note that the euro and the pound often (almost always) trade in the same direction. Therefore, it wouldn't be surprising if the pound also settles below the trendline today.

This would open up possibilities for the pound to fall towards the Senkou Span B line. Of course, any downward movement can easily come to an end near this line since the dollar is still weak, and market participants are not eager to buy it. However, this week will bring plenty of important information from the U.S., and if it turns out to be positive, the dollar could significantly strengthen its positions, especially amid a three-month decline and oversold conditions.

Therefore, we believe that the pair could potentially start a downward movement as early as tomorrow, which we could work with. The main condition is for the pair to breach the trendline.

Speaking of trading signals, there were quite a few on Friday, but volatility was weak, and the movements were chaotic. On the last day of the year, hardly anyone wanted to enter the market, especially since last week's movements were absolutely unpredictable. Therefore, we believe that the year has ended and it's best to leave it in the past.

COT report:

COT reports on the British pound show that the sentiment of commercial traders has been changing quite frequently in recent months. The red and green lines, representing the net positions of commercial and non-commercial traders, often intersect and, in most cases, are not far from the zero mark. According to the latest report on the British pound, the non-commercial group closed 10,000 buy contracts and 4,200 short ones. As a result, the net position of non-commercial traders decreased by 5,800 contracts in a week. Since bulls currently don't have the advantage, we believe that the pound will not be able to sustain the upward movement for long . The fundamental backdrop still does not provide a basis for long-term purchases on the pound.

The non-commercial group currently has a total of 58,800 buy contracts and 44,700 sell contracts. Since the COT reports cannot make an accurate forecast of the market's behavior right now, and the fundamentals are practically the same for both currencies, we can only assess the technical picture and economic reports. The technical analysis suggests that we can expect a strong decline, and the economic reports have also been significantly stronger in the United States for quite some time now.

Analysis of GBP/USD 1H

On the 1H chart, GBP/USD is making every effort to correct lower, but the uptrend remains intact. We believe that the British pound doesn't have any good reason to strengthen in the long-term. Therefore, at the very least, we expect the pair to return to the level of 1.2513. However, there are currently no sell signals, so the uptrend is still intact.

On Tuesday, there are few reasons for the pair to show volatile movements. We may see a flat phase, a downtrend, or an uptrend (intraday), so we need to purely rely on technical analysis. We expect the pound to consolidate below the trendline, and in that case, we can consider selling while aiming for the Senkou Span B line. An upward movement is theoretically possible today, but we see no reason for it, so you shouldn't consider buying at the moment.

As of January 2, we highlight the following important levels: 1.2215, 1.2269, 1.2349, 1.2429-1.2445, 1.2513, 1.2605-1.2620, 1.2726, 1.2786, 1.2863, 1.2981-1.2987. The Senkou Span B line (1.2646) and the Kijun-sen (1.2753) lines can also be sources of signals. Don't forget to set a breakeven Stop Loss to breakeven if the price has moved in the intended direction by 20 pips. The Ichimoku indicator lines may move during the day, so this should be taken into account when determining trading signals.

Today, the UK and the US will release their second estimates of business activity indices in the manufacturing sector for December. These are not significant reports so it is unlikely for traders to react to them.

Description of the chart:

Support and resistance levels are thick red lines near which the trend may end. They do not provide trading signals;

The Kijun-sen and Senkou Span B lines are the lines of the Ichimoku indicator, plotted to the 1H timeframe from the 4H one. They provide trading signals;

Extreme levels are thin red lines from which the price bounced earlier. They provide trading signals;

Yellow lines are trend lines, trend channels, and any other technical patterns;

Indicator 1 on the COT charts is the net position size for each category of traders;

Indicator 2 on the COT charts is the net position size for the Non-commercial group.