UK Inflation and COT Data Shows Potential Resistance For The Pound

<section itemscope="itemscope" itemtype="https://schema.org/BlogPosting" itemprop="blogPost"><div itemprop="text"><p>Up until now this year, the pound has made significant upward progress, continuing its recovery that began in September 2022 after a massive capitulation, pushing it to levels not seen since 1985 at 1.05.</p>
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<p>During that time, market sentiment was overwhelmingly bearish and pessimistic, a typical indicator of the end of major cycles. Therefore, the pound’s recovery doesn’t come as a surprise. The current rally has been driven partly by the UK’s prolonged and robust inflation compared to some other major countries.</p>
<p>Looking at it from an Elliott wave perspective, I observe the price ascending towards the upper side of a wedge, suggesting potential pullbacks unless the pair manages to breach the 1.32-1.34 area. Any retracement would likely require a significant catalyst, which could be linked to the cooling down of inflation as indicated by recent reports.</p>
<p>The COT data also holds importance here, as Large speculators are reaching extreme levels. In the past, such occurrences have led to shifts in market flows, potentially slowing down the bullish trend on cable. However, this may be temporary. From an EW standpoint, it seems that the pair hit a crucial low in 2022, and after a setback, the pound could resume its upward trajectory. There is strong support around 1.2-1.25 for any more substantial pullbacks in the future.</p>
<p><span lang="SL">Trade well, </span></p>
<p><span lang="SL">Grega Horvat</span></p>
<p><a href="https://twitter.com/GregaHorvatFX">@gregahorvatfx</a></p>
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<section itemscope="itemscope" itemtype="https://schema.org/BlogPosting" itemprop="blogPost"><div itemprop="text"><p><em>Source: Barchart</em></p>
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<section itemscope="itemscope" itemtype="https://schema.org/BlogPosting" itemprop="blogPost"><div itemprop="text"><p>Purely from a fundamental perspective, the market’s interest rate expectations had vastly run ahead of A. What the BOE was doing, and B. What the BOE was likely to do. In this last phase we had seen rate expectations really getting to over excessive levels at 6.5%-6.75%, with even some calls at 7%.</p>
<p>One of the ways I trade is to look out for these “extreme” price moments to then counter trade. As I’ve been saying on our various webinars, the rate expectations did not match what inflation was likely to do (and has done in June).  These price anomalies often mean there’s a big hole to fill when invariably, the expectations are not met.</p>
<p>For GBP, this was becoming a glaring opportunity not to be missed. However, it’s fine having a view and fundamental strategy but the difficulty is planning and timing a trade.  I have been reluctant to jump into cable due to the volatility around the USD side of the trade, so my chosen pair was EURGBP.</p>
<p>I chose this pair for two reasons. Firstly, we had a clear “rate expectation” move since May, which drove it lower from the 0.88’s down to the 0.85’s. That was a decent move that could give a decent spring back.</p>
<p>Secondly, the 0.8500 was a technically good looking area. It’s been a solid historical support zone.</p>
<p>Therefore, a mix of the technicals, the fundamentals, and timing made this a great place to try fighting the extreme rate pricing. As you can see, it proved solid.</p>
<p>From here I don’t expect to see a straight line to 0.90’s but I think the tide has changed, at least in the short-term, and as we can see from the bounce, even a slight change in the market’s expectations can bring a big enough reaction for us to trade.</p>
<p>Technically, 0.8700/20 remains the big level on the upside. If we are to undo the down trend, this is the level that must be broken. Fail to do so and we are likely to find a period of consolidation until the next BOE meeting in August.</p>
<p>Ryan Littlestone</p>
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