Overview of GBP/USD on October 18; Now the Pound Is Oversold, but Only Locally

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The GBP/USD currency pair traded higher on Thursday, which could mark the beginning of the long-awaited correction. We noted that the 1.3000 level is a psychological level from which the price might start a correction. However, it was impossible to predict precisely where the British currency would begin to rise. Let's first consider the technical aspects of the 4-hour time frame. The CCI indicator entered the oversold area, drew several bullish divergences, and re-entered the oversold area following the UK inflation report. In our view, this is enough for the British currency to show some growth. It's important to understand that the pound can also be oversold, though only locally. In other words, it had fallen too long in the short term. If the price now moves up to the 1.3150-1.3200 range, it would be enough to expect a resumption of the downtrend, which, in our opinion, has just begun.

Regarding the fundamental background, it supported the US dollar three months ago, six months ago, and even a year ago. Even though the US economy experiences rough patches, those are still better than the "recovery period" in the UK. We have already compared the US and UK economic states over the past two years. In reality, there's not much to compare. For two years, the market kept predicting a recession for the US while praising the British economy, even though it barely grew. Also, note that the Bank of England's rate was never higher than the Federal Reserve's rate during the entire hawkish policy period. It only surpassed it after September 18.

However, this doesn't mean that the BoE won't cut rates. This week, the UK inflation report was released, and no matter what the service or core inflation rates are, one cannot ignore the headline figure entirely. The headline figure reflects the sum of all inflation types. What's the point of bringing service sector inflation close to the target if other types of inflation fall to zero? Then, it would take considerable time to stimulate inflation again, which all central banks dealt with before the pandemic.

Therefore, we believe that the pound will correct itself soon. It is unlikely to correct too much. If the pair rises above the 1.3150 level (for example), it will likely mean the market still engages in baseless buying. Or perhaps it's now anticipating a future with Kamala Harris. Either way, the plan for the coming weeks is correction and a resumption of the downtrend that has just begun. In our view, the BoE will start cutting rates at each of its upcoming meetings, which the market likely did not fully anticipate.

The average volatility of the GBP/USD pair over the last five trading days is 62 pips, considered "average" for the pound/dollar pair. Therefore, on Friday, October 18, we expect movement within a range bounded by the levels 1.2947 and 1.3071. The higher linear regression channel is pointing upward, signaling the continuation of the upward trend. The CCI indicator formed six bearish divergences before any significant decline began. Recently, the indicator entered the oversold area and formed bullish divergences, indicating a potential upward correction.

Nearest support levels:

• S1 – 1.3000
• S2 – 1.2939
• S3 – 1.2878

Nearest resistance levels:

• R1 – 1.3062
• R2 – 1.3123
• R3 – 1.3184

Trading Recommendations:

The GBP/USD currency pair continues its substantial decline. We still do not consider long positions, as we believe that all factors favoring the British currency have already been priced in by the market multiple times. If you are trading based purely on "technical analysis," long positions are possible with targets of 1.3184 and 1.3245 if the price moves above the moving average line. Short positions are currently much more relevant, with targets at 1.2947 and 1.2939. The price is ignoring all oversold signals and bullish divergences, which do not guarantee an immediate start of a rise.

Explanations for Illustrations:

Linear Regression Channels: Help determine the current trend. If both are pointing in the same direction, it means the trend is strong.

Moving Average Line (20,0, smoothed): Defines the short-term trend and the direction in which trading should be conducted.

Murray Levels: Target levels for movements and corrections.

Volatility Levels (red lines): The likely price range in which the pair will trade over the next 24 hours, based on current volatility readings.

CCI Indicator: Entry into the oversold area (below -250) or overbought area (above +250) indicates an impending trend reversal in the opposite direction.

The material has been provided by InstaForex Company - www.instaforex.com #