What is needed to open long positions on GBP/USD
In my morning review, I told you about selling the pair at around resistance of 1.3746 on condition that the price makes a fake breakout there. Now let's look at a 5-minute chart and discuss what has happened. Decent data on the UK manufacturing PMI released today gave the buyers the greenlight to overcome resistance of 1.3746, but their efforts were not successful. Later, after a bounce to under that level (that was actually a fake breakout), the bulls tried again to push the price up to this level. Bad luck again. Such failed bulls' efforts inspired GBP sellers. At moment of writing this article, the price climbed 40 pips from the market entry point.
Despite the volatile market in the first half of the trading day, nothing has changed from the technical viewpoint. The bulls should defend support of 1.3693 which also serves as the middle line of the sideways channel where GBP got stuck for the whole last trading week. Data on the US economy and ISM Manufacturing PMI are likely to trigger higher volatility during the New York trade that will enable the pair to make a fake breakout at near 1.3693. Only this move will bring GBP buyers back to the market and encourage a second bounce to resistance of 1.3746 that has not been surpassed today.
Fixation at that area and its test downwards is expected to trigger GBP/USD growth to 1.3794 and 1.3846 where I recommend profit taking. Under the scenario of GBP decline and muted buyers' activity at around support of 1.3693 in the second half of the day, it would be better not to rush buying the pair. The best option is to wait until GBP/USD falls to a deeper low of 1.3637, which acts as the lower border of the sideway channel, and open long positions from there, bearing in mind an upward intraday correction of 20-25 pips.
What is needed to open short positions on GBP/USD
During the New York trade, the bears will endeavor to break the level of 1.3693. It would be reasonable to open short positions from there like it was with the entry point on Friday. I told you about this in detail in the morning review. A test of this level upwards creates a good market entry point, predicting a retreat to a low of 1.3637 which serves as the lower border of the sideways channel. A breach of this area will trigger some stop loss orders set by the buyers and encourage a further strong drop towards support of 1.3584 and 1.3531 where I recommend profit taking. Under scenario of GBP/USD growth in the second half of the day after the ISM manufacturing PMI, you should be very cautious about short positions. Only a fake breakout at near resistance of 1.3746 (like it was in the morning today) will create a signal for opening short positions. You are recommended to sell GBP/USD immediately at a bounce from a high of 1.3794, bearing in mind a minor 25-30 pips correction intraday.
Let me remind you that the COT report (Commitment of Traders) from January 19 logged a decrease both of long and short positions that indicates cautious sentiment on this trading instrument. Long non-commercial positions declined from 47,935 to 45,904. On the other hand, short non-commercial positions dropped from 34,993 from 32,199. Obviously, short positions decreased to a greater extent than long ones. As a result, the net non-commercial positions increased to 13,705 against 12,942 a week ago. Traders prefer to take the wait-and-see stance while the pair is trading at about one-year highs. It proves that the bulls find it hard to push the price to higher highs. Demand for GBP remains robust. Once the UK lifts restrictions under the third lockdown which was imposed to combat a mutant COVID-19 strain, GBP/USD will accelerate its advance. Meanwhile, GBP finds support from the cautious approach to monetary policy of the Bank of England. Besides, investors have another reason for optimism. Recently, the UK finance ministry proposed a new program of the labor market support. With such tailwinds, traders are betting in the medium-term strength of the pound sterling.
Signals of technical indicators
Moving averages
The pair is trading at about 30- and 50-period moving averages. It indicates that GBP/USD is trading in a range-bound market for the short term.
Remark. The author is analyzing a period and prices of moving averages on the 1-hour chart. So, it differs from the common definition of classic daily moving averages on the daily chart.
Bollinger Bands
A breakout of the indicator's upper border at near 1.3746 will lead to a new advance of GBP/USD. Alternatively, a breakout of the lower border at near 1.3693 will step up pressure on GBP/USD.
Definitions of technical indicators
- Moving average recognizes an ongoing trend through leveling out volatility and market noise. A 50-period moving average is plotted yellow on the chart.
- Moving average identifies an ongoing trend through leveling out volatility and market noise. A 30-period moving average is displayed as the green line.
- MACD indicator represents a relationship between two moving averages that is a ratio of Moving Average Convergence/Divergence. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. A 9-day EMA of the MACD called the "signal line".
- Bollinger Bands is a momentum indicator. The upper and lower bands are typically 2 standard deviations +/- from a 20-day simple moving average.
- Non-commercial traders - speculators such as retail traders, hedge funds and large institutions who use the futures market for speculative purposes and meet certain requirements.
- Non-commercial long positions represent the total long open position of non-commercial traders.
- Non-commercial short positions represent the total short open position of non-commercial traders.
- The overall non-commercial net position balance is the difference between short and long positions of non-commercial traders.
