4-hour timeframe
Amplitude of the last 5 days (high-low): 81p - 49p - 107p - 93p - 264p.
Average volatility over the past 5 days: 119p (high).
From our point of view, what happened to the pound in the last two trading days of the week cannot be called anything other than "chaos". Even now, when all the media highlighted the "main reason" for the British currency's sharp growth - productive negotiations between the prime ministers of Great Britain and Ireland on the Brexit issue, after which both sides stated that a "deal" with the European Union is still possible, it remains to us unclear: Another rumor about a possible conclusion of the agreement caused the pound to grow by 450 points in two days? That is, as soon as Boris Johnson and Leo Varadkar declare that it is still possible to agree on the Irish border, all traders rushed to buy the pound. But what about the position of the European Union, which, in fact, has not changed in any way? After all, the European Union has repeatedly stated that Johnson's proposals do not solve all the problems in the Brexit issue and an alternative to the back-stop mechanism on the Northern Irish border, as well as in questions of further life and Britain-EU relations after Brexit. What changed after Varadkar and Johnson agreed? Nothing. It should be noted that all the "first" persons of the EU, Junker, Tusk, Merkel, Macron, Barnier, have repeatedly stated that there is certainly a chance to come to an agreement with Great Britain, but it is small. Now, 5 days before the key EU summit, at which London and Brussels will either sign the agreement, or Johnson will ask to postpone Brexit to a later date, the rhetoric of these politicians has not changed at all. Donald Tusk, head of the European Council, said at a press conference in Nicosia on Friday that there was little chance of reaching an agreement with London. However, as we have said, the EU has never rejected this chance.
But there remains a whole host of questions that traders clearly did not take into account when they were actively buying the pound. We list them:
1) The European Union may banally reject Johnson's proposals for the EU summit. One more time.
2) The parties will simply not have enough of the remaining 5 days to discuss all issues regarding Brexit and the agreement on it and Brexit will still have to be postponed.
3) The Parliament of Great Britain will refuse to vote for a new deal, now by Boris Johnson, just as it had rejected Theresa May's deal earlier.
The likelihood of any of these options being executed is much higher than the likelihood of a deal. But what really needs to be noted is Boris Johnson's changed rhetoric, from which recently the words about "leaving the EU in any case on October 31" have disappeared sharply. Now the British prime minister poses the question as follows: either a deal with the EU, or a new postponement of Brexit. He informed the MPs about this, who will gather for an extraordinary meeting on October 19 in order to quickly respond to the results of the EU summit on October 17-18.
From the foregoing, this is what follows: we fully support the position of the European Union, which does not deny the possibility of concluding an agreement, but believes that the chances of a successful outcome of the negotiations are low. Thus, such a firm growth in the pound is clearly not consistent with the strength of the information that became the basis for the strengthening. That is why we assume that the pound will begin to become cheaper in the near future. Firstly, a technical downward correction is needed, which could reach 50% of the growth of the pound/dollar pair. This is a potential decrease to 1.2470, that is, to the Kijun-sen line. Secondly, now the pound, in order to maintain these positions, needs confirmation that London and Brussels really are going to sign the agreement until October 19. If such information is not available to traders, then the feeling of euphoria will quickly be replaced by a feeling of disappointment. Thirdly, if the notorious deal is not concluded before October 19, the pound sterling is almost guaranteed to resume the downward trend.
Trading recommendations:
The GBP/USD currency pair continues its strong upward movement. Thus, we recommend now continuing to hold long positions for those who are already in them, but not opening longs to those who have not done this before. From our point of view, there is a high probability of a downward correction or even the resumption of a downward trend. In any case, the pound can be thrown from side to side next week, and volatility can be very high.
In addition to the technical picture, fundamental data and the time of their release should also be taken into account.
Explanation of the illustration:
Ichimoku indicator:
Tenkan-sen is the red line.
Kijun-sen is the blue line.
Senkou Span A - light brown dotted line.
Senkou Span B - light purple dashed line.
Chikou Span - green line.
Bollinger Bands Indicator:
3 yellow lines.
MACD indicator:
Red line and bar graph with white bars in the indicator window.
The material has been provided by InstaForex Company - www.instaforex.com