Fundamental analysis

GBP/USD: plan for the European session on November 3. COT reports. The pound rushed down, but hope remains

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Several good market entry signals were formed yesterday. Let’s take a look at the 5-minute chart and see what happened. Earlier, I asked you to pay attention to the 1.1496 level to decide when to enter the market. The UK did not release any data, so we had no reason to sell the pound below 1.1496. The reverse test after the breakout did not take place and the bulls quickly regained control of 1.1496. The technical picture changed in the afternoon. A false breakout from 1.1489 gave a good signal for longs, but the move up was about 25 pips and that was it.

We only received a signal to sell from 1.1546 after the Fed announced its decision on interest rates and the pound sharply strengthened, as there was a false breakout there. The collapse of the GBP/USD was not long in coming. As a result, the pair fell by more than 140 points.


When to go long on GBP/USD:

Today is a very important day and we need to carefully consider what the Bank of England will do in response to the rapid inflationary pressures that continue to push the British economy into recession. The decision on the main interest rate will be announced closer to the middle of the day, but the summary on monetary policy and the speech of BoE Governor Andrew Bailey are much more important. Statements that it is necessary to continue to actively raise rates in response to high inflation will lead to a fall in the British pound, as this will further aggravate the situation in the economy, sliding into recession. If the BoE loosens its grip, which is unlikely, it will also not help the pound as much, as it will allow inflation to rise further – further fueling the crisis in the cost of living in the UK.

If the pair goes down, a false breakout in the area of the nearest support at 1.1380 will give a signal for longs in order to restore and update the resistance of 1.1435, slightly above which the moving averages go, playing on the bears’ side. A breakout and test may change the situation, allowing bulls to build a more powerful correction with the prospect of updating 1.1489, but even this will not hurt the bears as much. The farthest target of the bulls will be 1.1553, where I recommend locking in profits. Testing this level holds back the pair from the horizontal channel. If the bulls do not cope with the tasks set and miss 1.1380 after the BoE announces its decision, then the pair will be under pressure. If this happens, I recommend longs on a false breakout of 1.1307. It will be wise to go long after a bounce off from 1.1261, or even lower – around 1.1210, expecting a rise of 30-35 pips.

When to go short on GBP/USD:

Bears will try to keep the pair in the bearish trend formed on October 27th. As long as trading is below 1.1435, we can expect a major drop at any time. That is why it is so important that in case the pound grows after the BoE’s decision on interest rates, there is a false breakout of 1.1435. A good sell signal will help push the pound back towards 1.1380, an interim support formed following the Asian session. A breakout and upward test will provide an entry point in hopes of continuing the bear market and a renewal of the low at 1.1307. The farthest target will be the area of 1.1261, where I recommend locking in profits.

In case the pair grows and bears fail to protect 1.1435, the bulls will continue to enter the market, counting on building a new upward trend. This will push the GBP/USD to the 1.1489 area. A false breakout at this level will provide an entry point into shorts with the goal of moving down. If bears are not active there, I advise you to sell GBP/USD immediately from 1.1553, expecting a decline of 30-35 pips.


COT report:

The Commitment of Traders (COT) report for October 25 showed that short positions decreased while long ones had grown. Political changes in the UK are playing on the bulls’ side, but now many are waiting for how the Bank of England will behave in relation to rates, as well as a new economic program from British Prime Minister Rishi Sunak. Do not forget that the pound, as a risky asset, largely reacts to the Federal Reserve’s decisions on interest rates. The committee will hold a meeting this week, where the rate will be raised by 0.75%, which may weaken the position of GBP/USD and lead to a larger decline. However, only the Fed’s commitment to maintaining a super-aggressive policy in the near future will be able to change the upward trend in the pound. Otherwise, it will be possible to observe the next pullback of the pound up. The latest COT report indicates that long non-commercial positions increased by 3,183 to the level of 43,511, while short non-commercial positions decreased by 223 to the level of 91,316, which led to a slight decrease in the negative value of the non-commercial net position to -47,805 versus -51,211 a week earlier. The weekly closing price rose to 1.1489 against 1.1332.


Indicator signals:

Trading is performed below the 30- and 50-day moving averages, which indicates further decline for the pair.

Moving averages

Note: The period and prices of moving averages are considered by the author on the one-hour chart, which differs from the general definition of the classic daily moving averages on the daily chart.

Bollinger Bands

If the pair drops, the lower limit of the indicator around 1.1350 will act as support.

Description of indicators

  • Moving average (moving average, determines the current trend by smoothing volatility and noise). The period is 50. It is marked in yellow on the chart.
  • Moving average (moving average, determines the current trend by smoothing volatility and noise). The period is 30. It is marked in green on the graph.
  • MACD indicator (Moving Average Convergence/Divergence – convergence/divergence of moving averages). A fast EMA period is 12. A slow EMA period is 26. The SMA period is 9.
  • Bollinger Bands. The period is 20.
  • Non-profit speculative traders are individual traders, hedge funds, and large institutions that use the futures market for speculative purposes and meet certain requirements.
  • Long non-commercial positions are the total number of long positions opened by non-commercial traders.
  • Short non-commercial positions are the total number of short positions opened by non-commercial traders.
  • The total non-commercial net position is a difference in the number of short and long positions opened by non-commercial traders.

The material has been provided by InstaForex Company –