Hello, dear colleagues!
Last week, the pound-dollar currency pair showed a strengthening. However, the subsequent upward trend of the British currency against the US dollar raises questions. We will talk about this a little later, but for now, we will talk about events that will have a significant impact on the dynamics of GBP/USD.
Although the pound, like the Japanese yen, became the only major currencies that strengthened against the US dollar, there are still few factors for further growth of the pound.
Friday’s data from the UK on the PMI manufacturing activity index, as well as the PMI in the services sector, were better than the forecast values, which was somewhat of a surprise for market participants. However, these positive reports did not bring dividends to the pound.
This week, the most important events for the GBP/USD pair will be the decisions on the rates of the Central Banks of both countries. Let me remind you that the Federal Reserve will announce its verdict on monetary policy this Wednesday, 20:00 (London time). A little later, at 20:30 (London time), a press conference will be held by Fed Chairman Jerome Powell. As the vast majority of economists expect, there will be no changes and the refinancing rate will remain at 1.75%. On the other hand, US President Donald Trump continues to put pressure on the US Central Bank to pursue a more lenient monetary policy.
Against this background, some representatives of the Federal Reserve, namely the head of the Minneapolis Fed, Neil Kashkari, believes that the current rates should be reduced. In general, Donald Trump, as we know, is characterized by stubbornness and achieves his goals. If you remember, he has long put pressure on his fellow party member and protege, whom he recommended (in fact, appointed) to the post of head of the Fed, Jerome Powell. Let me remind you that the Federal Reserve is an independent Federal Agency that makes decisions on its own.
Nevertheless, after Trump’s “recommendations” to ease monetary policy, the main interest rate has already been lowered three times. It seems that this is still far from the limit. There are already rumors that after a certain period, the refinancing rate may even be at a negative value. Wait and see. Since the main rate is not likely to change at the end of the two-day meeting of the US Federal Open Market Committee, the main attention of market participants will be focused on the accompanying FOMC statement and, especially, on the press conference of the Fed Chairman.
In my opinion, the tone of Jerome Powell’s speech will determine the reaction of investors and the direction of the US dollar. Now, as for the British currency. Brexit remains the main driver for the pound’s dynamics. As you know, Queen Elizabeth II of Great Britain signed the Brexit bill. This may be a formality after the positive decision of the British Parliament to leave the EU, but it has been observed.
Another extremely important event for the “Briton” will be the decision of the Bank of England on the interest rate, which will be released on Thursday, January 30. Here, too, no changes are expected and the rate is likely to remain at 0.75%.
However, the reaction of the market and the dynamics of the pound will depend on the distribution of votes of members of the Monetary Council of the Bank of England. At the moment, about 50% of the Monetary Council members are in favor of easing monetary policy, so changes of at least one vote in one direction or another can cause significant fluctuations in the British currency.
Weekly
As it was already assumed last Friday, the closing of weekly trading, at least above the Tenkan line of the Ichimoku indicator, will increase the pair’s chances of continuing to move in the north direction. However, as we can see, this did not happen. The Tenkan line acted as a strong resistance, and the closing price on January 20-24 was 1.3070.
For the forecast and, especially, opening positions for this pair, the situation is quite ambiguous. I believe that a lot of the future direction of the quote will depend on the Fed and the Bank of England. And, of course, do not forget that the end of the divorce process between the UK and the European Union is scheduled for January 31, and it is unlikely that anything can prevent this.
Daily
On the last day of the last five-day trading session, despite the positive PMI statistics, the “Briton” weakened against the US dollar. This trend was observed on Thursday, January 23, however, a more intense downward trend was observed on the last day of trading last week.
I believe that the GBP/USD pair technically has every reason to continue moving in a southerly direction, with the nearest targets being 1.3000 and 1.2960. However, the most important events, which have been written about a lot above, can make serious and even drastic changes to the technical picture for GBP/USD.
For this reason, I will refrain from specific trading recommendations for this currency pair. Extremely high volatility and sometimes inexplicable sharp and strong movements can create serious risks and lead to significant losses.
All the best!
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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