06.10.202618:25 Forex Analysis & Reviews: GBP/USD – Smart Money Analysis: The Pound's Recovery Remains Limited

GBP/USD was in a period of almost uninterrupted decline for eleven days, but for more than a week it has been making repeated attempts to begin a corrective recovery. At present, the bearish imbalance 30 is preventing any meaningful correction and is acting as a resistance zone for the price. There are currently few factors supporting a sustained recovery by bullish traders. The liberation war in Yemen began over the weekend, while the market's reaction to Friday's Nonfarm Payrolls report and unemployment rate was largely limited. The pound had an opportunity to recover last week following a series of hawkish statements from Bank of England policymakers and a strong second-quarter GDP report, but these factors have not yet resulted in a sustained recovery. In the current assessment, the weakness of bullish traders is difficult to explain. The fundamental background for the euro and the pound is not sufficiently negative to prevent both currencies from recording even a limited recovery.

It is also worth noting that traders expect the Bank of England to implement the same two monetary policy tightenings as the Federal Reserve. Moreover, the dot plot indicates only one policy tightening. Therefore, the Bank of England could ultimately tighten monetary policy even more than the Federal Reserve, which should limit further gains in the U.S. dollar. However, the dollar continues to strengthen in most cases.

Despite the unfavorable conditions for the British pound in recent weeks, the U.S. dollar has also faced several negative factors in recent months. If the Federal Reserve had not decided to raise the interest rate in September and indicated that it was prepared to tighten policy at least once more before the end of the year, a decline in the U.S. dollar would still be expected. That expectation remains in place, but from lower levels. At present, however, the prospects for bullish traders depend primarily on a liquidity sweep of the lows from July 28 or June 24, as well as the formation of new bullish patterns, which would require a sustained upward move. The chart shows that most reversals over the past year occurred following liquidity sweeps, so this remains a potentially important technical development. The reaction to bearish imbalance 30 has so far been limited, which may indicate that bearish momentum is weakening. This could provide an opportunity for the pound, although the potential remains limited.

Are there further prospects for bearish traders? In the current assessment, they are limited, but it should be acknowledged that the dollar remains in a favorable phase and retains strong potential for further gains until imbalance 30 is invalidated. The Federal Reserve not only decided to raise the interest rate but also indicated to traders that further tightening remains possible. A prolonged decline in GBP/USD is unlikely to be driven by this factor alone, but the market has been pricing in the FOMC rate increase throughout recent weeks. There is little currently preventing the market from continuing to buy the dollar for several more weeks if expectations of further FOMC monetary policy tightening remain in place.

Technical analysis shows that the overall structure remains fully bearish following the liquidity sweep of the May highs. The pound reacted to bearish imbalance 27, resulting in a 320-point decline in the exchange rate. 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 bullish traders.

The economic fundamental background was again of limited importance to traders on Tuesday, as has been the case in recent weeks. There were no important economic reports today, and the U.K. economic calendar contains no major events this week. Therefore, today's recovery by bullish traders is based primarily on market positioning and the cumulative developments of the past month.

The overall fundamental background remains such that a decline in the U.S. dollar is still expected over the long term. The war between Iran and the United States has not changed this assessment. Geopolitical developments caused 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 course of FOMC monetary policy remains uncertain, while the market continues to focus primarily on further tightening, which is the main factor supporting bearish traders. In the current assessment, any further strengthening of the dollar is likely to be temporary and driven by short-term factors. It is also important to note that GBP/USD has been trading within a range for an entire year. A range allows for a wide variety of price movements within its boundaries.

Economic Calendar for the United States and the United Kingdom:

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

The economic calendar for October 7 contains only one secondary release. The economic background is unlikely to have a significant impact on market sentiment on Wednesday.

GBP/USD Forecast and Trading Tips:

The long-term outlook for the pound remains bullish. Bearish traders have controlled the market in recent weeks, but the range is clearly visible even on the daily chart. The liquidity sweep of the swing low from May 1 initiated a new decline, while the sell signal within inverted imbalance 27 allowed the decline to continue. Therefore, the pound's decline may continue toward the June lows, where a liquidity sweep could occur, 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 producing a sell signal. In that case, the decline would continue.