Risk management and market timing are equally important. The process would be so much easier if it were all based on the divergence between the policies of the two central banks and their bank rates. The divergence in monetary policy is a major driving force; it is just that it is a deep, slowly advancing force that underpins all other developments. Whenever macroeconomic events coincide with policy divergence, we see an acceleration in the movement of the forex pairs. In cases where fundamentals and sentiment conflict with the underlying theme, the moves are generally less impulsive because the underlying force acts as a drag.
Forex Analysis
Considering the euro is more exposed to the Ukrainian conflict than the pound, yesterday's encouraging signs towards some de-escalation was a net positive for EURGBP. The pair briefly rose above 0.8400 and all March losses were erased. But this market is volatile, and we may be back to the lows again by the end of the week. According to analysts, the EURGBP is overvalued by ~1%, which suggests the euro is pricing in a risk premium with regards to the Ukraine conflict, as monetary policy divergence between the ECB and BoE is still an argument for the weaker EURGBP. The Bank of England is in a blackout period ahead of the next BoE MPC meeting.
Cable may break above 1.3200 today but further strength will likely be limited by investors' reluctance to let go of all their defensive US dollar positions given the elevated uncertainty regarding geopolitics and the liquidity of the market. If they do drop their bullish US dollar positions post the US CPI reading today or if the euro were to drop against the pound after the ECB press conference today, the weekly GBPUSD is showing buying pressure from the 1.3080 level which originates from the balance area printed in October 2020 and this confluence could accelerate cable higher. If we were to take out this week's low my current thesis would be invalidated, so all stops go below 1.3079.
My base-case idea is that the GBPUSD travels back into the early 2022 balance area and tests around the 1.3400 to 1.3500 zone. Currently, the price action is trying to get above the late 2021 swing low, and if successful there is little market structure to act as resistance.
The bullish daily close yesterday signalled the bears were taking profits after a month of selling pressure. Today's return to the Tuesday high and subsequent rejection is the set-up I was waiting for to show the bulls had a chance of retaining control.
What we are seeing on the m30 chart is that price is compressing under the 200-period moving average, which is confluent with the higher time frame market structure from December 2021. For London breakout traders the current price action is still trading within the Asia-Pac session so any push above the London open and an indication that the m30 200-period EMA is going to act as support may be the trigger.