07.10.202617:53 Forex Analysis & Reviews: GBP/USD – Smart Money Analysis: The Upward Trend May Resume

The GBP/USD pair was in near-freefall for eleven days, but for more than a week it has been making determined attempts to begin a corrective pullback. So far, these attempts have been completely unsuccessful. At present, any correction is being blocked by bearish imbalance 30, which acts as a resistance zone for the price. There are currently few reasons for optimism among buyers. An armed conflict began in Yemen over the weekend, while the market reacted only formally to Friday's Nonfarm Payrolls report and unemployment rate. The pound had opportunities last week following a series of hawkish statements from Bank of England policymakers and a strong second-quarter GDP report, but, as we can see, these factors have so far failed to produce any meaningful result. In my view, buyers are showing weakness that is difficult to explain. The fundamental backdrop for the euro and the pound is not currently bad enough to prevent both currencies from posting even modest gains.

I would also note that traders expect the Bank of England to deliver the same two instances of monetary policy tightening as the Fed. Moreover, I will repeat that the dot plot indicates only one policy tightening. Therefore, the Bank of England could ultimately tighten policy even more than the Fed, which clearly should not support further gains in the U.S. currency. Yet the dollar is rising, in most cases.

Despite the unfavorable picture for the British pound that has developed in recent weeks, the dollar has also faced numerous negative factors in recent months. Had the Fed not decided to raise interest rates in September and signaled its willingness to tighten policy at least once more before the end of the year, I would still expect the U.S. currency to decline. I still expect this, but from lower levels. However, the bulls' opportunities now depend only on a liquidity sweep of the low from July 28 or June 24, as well as the formation of new bullish patterns, which require a sustained rise. The chart clearly shows that most reversals over the past year occurred following liquidity sweeps, so in my view, this represents a good opportunity. The reaction to bearish imbalance 30 remains weak so far, which could indicate that the bearish momentum is fading. This may provide an opportunity for the pound. A small one, but still an opportunity.

Do the bears have further prospects? In my view, there are few, but it should be acknowledged that the dollar remains in a favorable position and, until imbalance 30 is invalidated, retains strong potential for further gains. The Fed not only decided to raise interest rates but also signaled to traders that it was prepared to continue tightening. I do not believe that a prolonged decline in GBP/USD can be driven by this factor alone, but in recent weeks the market has been focused almost exclusively on pricing in an FOMC rate hike. What could prevent it from continuing to buy the dollar for several more weeks amid tighter Fed monetary policy?

Technical analysis shows that the overall picture remains fully bearish following the liquidity sweep of the May highs. The pound reacted to bearish imbalance 27, which triggered a 320-point decline in prices. The target of the decline was imbalance 25, and this pattern was both reached and broken. Bearish imbalance 30 is acting as a strong resistance zone for buyers.

There was no significant economic news on Wednesday. The Fed minutes will be released in the evening, and I do not expect any unexpected information from them. The Fed decided to raise interest rates in September, and all members of the Board voted in favor of the decision. Therefore, the minutes are unlikely to reveal a more hawkish stance than the market has already priced in, and it has done so more than once. I do not consider a strong rise in the dollar on Wednesday to be a logical consequence of the FOMC minutes, which have not yet been published.

The overall fundamental backdrop remains such that, in the long term, I cannot and do not expect anything other than a decline in the U.S. currency. The war between Iran and the United States has not changed my expectations. Geopolitical developments prompted the market to focus on the dollar's safe-haven status for several months, but the conflict has already passed its most acute phase. The future path of FOMC monetary policy remains uncertain, while the market continues to price in only tighter policy, which is the main reason for the bears' positive outlook. In my view, any rise in the dollar is temporary and driven by short-term factors. I would also note that GBP/USD has been trading within a range for an entire year. A range allows for virtually any movement within its boundaries.

Economic Calendar for the United States and the United Kingdom:

• United States – FOMC Meeting Minutes (18:00 UTC).

On October 8, the economic calendar contains only one secondary event. The economic backdrop is expected to have no significant impact on market sentiment on Thursday.

GBP/USD Forecast and Trading Tips:

The long-term outlook for the pound remains bullish. Bears have controlled the market in recent weeks, but overall, the range is visible even on the daily chart. The liquidity sweep of the swing low from May 1 triggered a new decline, while a sell signal within inverted imbalance 27 allowed the decline to continue. Thus, the pound remains under downward pressure, which could continue toward the June lows. A liquidity sweep of those lows could then be followed by a reversal in favor of the pound. However, in the near term, the price may react once again to bearish imbalance 30, potentially forming a sell signal. In that case, the decline would continue.