At first sight, yesterday’s drop in the had no grounds. There was no news that could affect the market situation. Thus, it is quite possible that it was high speculative activity that led to such strange movements. Nevertheless, on closer examination we could see some reasons for such a decline. Firstly, the pound sterling is significantly overbought and it was hovering near its 2-year high.
This is a clear sign to a downward correction. Secondly, today, the US will report on its , which is expected to advance to 4.7% from 4.2%. Such a jump is likely to make the US Fed tighten its monetary policy, thus raising the key interest rate. The US economy is not ready for such changes and they will surely have a negative effect on its recovery. That is why after the publication of the US inflation data, the British pound may significantly gain in value. However, the currency’s potential to rise is capped because of the overbought conditions. If the pound sterling drops ahead of the publication of the US inflation figures, it will have more chances to reach new highs. Although yesterday’s decrease had a speculative nature, there were some grounds for it.
US Inflation Rate
The pound/dollar pair has been trading sideways between 1.4100/1.4245 for three and a half weeks, touching one limit after another. The reading of 1.4172 acts as the middle level of the range. When the price reaches this level, the volume of long positions declines, as a rule. The 90-hour fluctuation points to the accumulation process near the lower limit of the range at 1.4100/1.4200. However, there are no significant changes.
The market dynamic is accelerating, which is proved by high speculative activity. Judging by the current location of the pair, we can say that a rebound from the middle level of the range returned the price to the lower limit.
That is why traders may still use the approach based on a rebound within the range. The pound/dollar pair is likely to hover near the levels of 1.4100/1.4200 until it fixes below 1.4080 and breaks the lower limit of the channel. If the price consolidates above 1.4205, it will trade in the upper part of the range.
In terms of complex indicator analysis, we see that technical indicators both in a one-minute and one-hour charts are signaling short opportunities due to the price return to the lower limit of the sideways channel.
Sincerely, InstaForex Group analyst, DEAN LEO