The Bank Of England's Monetary Policy Continues To Have A Significant Impact On The Value Of The Pound

Long-term outlook.

This week, the GBP/USD currency pair has traded somewhat differently than the EUR/USD pair. Second, the value of the pound increased somewhat at the start of the week. The power differential between the pound and the dollar was unaffected by this growth, but it did reduce the market's "bearish" attitude, making the pair's overall decline relatively mild. And it is obvious from the following image that the pair is moving sideways rather than downward if you pay great attention to it. Even closer examination reveals that the pair has been trading in the range of 1.1840 and 1.2440 for some time. Thus, we are currently dealing with a flat. Despite rising by more than 2,000 points over the last six months, the British pound shows more resistance than the euro. It's difficult to determine how this is connected. The UK's business activity figures, which many were surprised to see turned out to be substantially better than predicted values, helped the pound this week. Generally speaking, we think that the level of 1.1840 will reveal what will happen to the pair moving forward. If it is overcome, a much more logical downward correction with the potential to fall by another 300–400 points will commence. A rebound from 1.1840 signals the start of a new cycle of growth within the side channel.

The Bank of England's monetary policy continues to have a significant impact on the value of the pound, but the market essentially lacks knowledge about it. If everyone is aware of what to anticipate from the Fed for the foreseeable future, then not from the Bank of England. While they talk relatively frequently, BA representatives don't often make loud pronouncements. Although this issue with the ECB and the Fed has already been handled by 99%, it is now completely unknown even how much BA will increase the rate in March. Even after ten rate increases, there is still hope that the British regulator will use all available means to bring inflation back to 2%. Moreover, "everything feasible" refers to tightening monetary policy even further.

COT evaluation.

COT reports for the British pound have not been made public in the past month. The report for January 31 was released a month ago, although it was only made public on Friday. There were not many changes as reported. The non-commercial group opened 1,4000 buy contracts and closed 4,1000 sell contracts throughout the week. As a result, non-commercial traders' net position has increased by over 10,000. The net position indicator has been increasing gradually over the past few months, but the major players' outlook is still "bearish," and even though the pound sterling is strengthening against the dollar (in the longer term), it is quite challenging to determine the basic reasons why. We utterly do not rule out the possibility that the pound will decline in the foreseeable future. Although it has officially started, thus far it appears to be flat. Furthermore observe that both main pairs are currently moving quite similarly, but the net position on the euro is positive and even suggests that the upward momentum will soon come to an end, while it is negative on the pound. A total of 54 thousand sales contracts and 36 thousand purchase contracts have now been opened by the non-commercial group. As we can see, the difference is still pretty significant. While there are technical reasons for this, geopolitics certainly do not support such a significant and quick rise of the pound sterling, thus we continue to be wary about the currency's long-term growth.

Analysis of fundamental events

This week in the UK, there was essentially nothing interesting. Business activity indices helped the pound at the start of the week, as we've already mentioned, but there was nowhere else to turn for assistance. This week, fairly unimpressive and worthless GDP data was made public in the United States. Even though the second evaluation turned out to be lower than the first, it is still pretty high. In particular, given recent reports that America is set to enter a recession. The labor market is in excellent shape, and the GDP numbers indicate that there is no recession. As a result, we think that this will contribute to further US dollar growth. Of course, the Fed's key rate's continued increase is another important aspect. Powell's most recent statements allow another 3–4 hikes this year. This information is especially important in light of the January slowing in the rate of inflation decline.

Trading strategy for the week of February 27 to March 3:

1) The pound/dollar pair is currently in the side channel between 1.1840 and 1.2440. Short positions are therefore more pertinent right now, although it's unlikely that the pair will emerge from the side channel anytime soon. Thus, we suggest delaying additional sales until the 1.1840 level is broken. Then, taking short positions with a target 300–400 points lower will make sense.

2) Purchases won't be important unless the price is fixed above the crucial line or there is another strong signal. Yet, given the flat market, even fixing above Kijun-sen does not ensure that the recent rally would continue. Moreover, purchases are permitted when returning to the side channel's lower border to reach the top border.

Explanations for the illustrations:

Fibonacci levels, which serve as targets for the beginning of purchases or sales, and price levels of support and resistance (resistance and support). Take-profit levels may be close by.

Bollinger Bands, MACD, and Ichimoku indicators (standard settings)

The net position size of each trading category is represented by indicator 1 on the COT charts.

The net position size for the "non-commercial" category is shown by indicator 2 on the COT charts.

 

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