The U.S. dollar weakened today against major currencies as inflation showed signs of easing, which further supported the possibility of a Fed interest rate cut in September.

The U.S. consumer price index (CPI), a key measure of inflation, rose 2.9% annually, just 0.1% below June’s rate.

This decrease was in line with market forecasts and marked the first time the CPI has fallen below 3% since March 2021. This suggests that underlying inflationary pressures may be easing.

The Fed has been working to control inflation, which has been running above its target rate of 2% for some time.

Yesterday’s lower-than-expected PPI  may have created high expectations for a lower-than-expected CPI report.

But the actual numbers released this morning were largely in line with forecasts, which lowered the likelihood of a 50-basis point rate cut in September and softened the blow to the dollar.

While the euro gained strength against the dollar, the British pound had a mixed response.

Its choppy price action was also due to U.K. headline inflation rising less than anticipated in July, coupled with a larger-than-expected decline in services inflation

While GBP/USD ended slightly lower today, its technical picture is looking cautiously bullish.

Welcome to TA of the Day (TAOTD)! 👋

Let’s focus on the current technical setup of GBP/USD based on the 4-hour chart:

📈 Technical Analysis of GBP/USD 4-Hour Chart

Using technical analysis concepts covered in our forex course, let’s analyze GBP/USD.

Simple Moving Averages:

• 20-period SMA: Positioned around 1.2800. The price is currently hovering around this level, indicating a potential short-term consolidation and area of interest. The slope is upward, reflecting recent short-term bullish momentum.
• 50-period SMA: Positioned around 1.2761. The price is above this level, indicating support for the medium-term bullish momentum. The slope is upward, suggesting a potential continuation of the uptrend.
• 100-period SMA: Positioned around 1.2806. The price is near this level, indicating it is an immediate resistance or support level. The slope is neutral, suggesting a balance between buying and selling pressures in the medium term.
• 200-period SMA: Positioned around 1.2827. The price is slightly below this level, indicating long-term bearish momentum still has some influence, but the recent uptrend is challenging it. The slope is neutral to slightly downward, indicating lingering bearish pressure.

Relative Positioning of Moving Averages:

• The 20-period SMA is above the 50-period and 100-period SMAs but below the 200-period SMA, indicating a short-term bullish momentum within a broader mixed trend.
• The 50-period SMA is below the 100-period and 200-period SMAs, confirming that medium-term and long-term trends are still under bearish pressure.
• The 100-period SMA is below the 200-period SMA, indicating that the long-term bearish trend still holds, although the recent price action is testing this trend.

Williams %R (14):

• Williams %R: The current reading is -36.99, which is in the middle range, neither overbought nor oversold.
• Recent oscillations suggest indecision in the market.

🕵️ Key Observations

Price Action:

Let’s analyze the recent price action of GBPUSD based on the chart:

1. Sharp Rally: In early to mid-July, there was a significant upward movement, with the price rising from around 1.2650 to a peak near 1.3050. This represents a strong bullish phase.
2. Rejection at Peak: Upon reaching the high around 1.3050, there was a clear rejection, indicated by a long upper wick on the candle at the top.
3. Corrective Phase: Following the peak, the price entered a corrective phase, characterized by a series of lower highs and lower lows. This correction brought the price down to around 1.2650 by early August.
4. Volatile Swings: During the corrective phase, there were several volatile swings, with the price oscillating between support and resistance levels.
5. Double Bottom Formation: In early August, the price formed what appears to be a double bottom around the 1.2650 level, suggesting a potential reversal point.
6. Recent Recovery: After forming the double bottom, there’s been a notable recovery. The price has moved back above all the key simple moving averages (SMAs).
7. Break Above SMAs: The recent bullish move has seen the price decisively break above the 20, 50, 100, and 200 SMAs, indicating renewed bullish momentum.
8. Current Consolidation: In the most recent days, the price seems to be consolidating just above the 200 SMA, with small-bodied candles indicating some indecision.
9. Rejection of Higher Levels: The latest candles show long upper wicks, suggesting some rejection or resistance at higher levels around 1.2850.

Support and Resistance Levels:

• Support: Immediate support is around 1.2800 (20-period and 100-period SMA) and 1.2761 (50-period SMA).
• Resistance: Immediate resistance is around 1.2827 (200-period SMA) and 1.2850 (recent highs).

Moving Averages:

• The 20-period SMA is currently acting as support in the short term, while the 200-period SMA provides significant resistance in the long term.
• Price is currently above all SMAs, suggesting a bullish bias in the short to medium term.

🤔 Potential Trade Scenarios

Is GBP/USD a buy or sell?

The following trade scenarios are provided solely for educational purposes. Since they don’t include full risk management practices, they are not intended to serve as actual trade recommendations, but merely food for thought to help you generate your own trade idea.

Long Bias:

• Consideration Point: Consider entering a long position if the price finds support near 1.2800 (20-period and 100-period SMA) or 1.2761 (50-period SMA) and shows signs of a bounce, such as a bullish candlestick pattern or a reversal in Williams %R from neutral to oversold territory. Additionally, a breakout above the resistance level at 1.2850 would indicate a potential continuation of the uptrend.
• Invalidation Point: Consider setting a stop-loss below the support level of around 1.2700 to manage risk.
• Potential Target: Look for a move towards 1.2900 and higher if the uptrend resumes.
• Rationale: Targeting 1.2900 is based on the previous resistance level and psychological significance. If the price manages to break above 1.2850, it would indicate strong bullish momentum and the possibility of further upside.

Short Bias:

• Consideration Point: Consider entering a short position if the price fails to hold the support level at 1.2800 (20-period and 100-period SMA) and shows signs of bearish momentum, such as a strong bearish candlestick pattern.
• Invalidation Point: Consider setting a stop-loss above the recent high at 1.2850 to manage risk. This level is crucial as a break above it would invalidate the bearish setup.
• Potential Target: Initial target could be the support level around 1.2700. If bearish momentum continues, look for further downside towards 1.2650 or lower.
• Rationale: Targeting 1.2700 initially is due to it being a psychological and historical support level. If the price breaks below this level, it would signal further bearish momentum and the potential for a more significant downside toward the next support level at 1.2650.

📝 TAOTD Summary

• Current Position: The price has been in an uptrend since early August, with higher highs and higher lows. Recently, the price has started to consolidate around the 1.2800 level, which coincides with the 20-period and 100-period SMAs, indicating a potential decision point.
• Trend: The short-term trend appears to be bullish with prices above the 20-period, 50-period, and 100-period SMAs. However, the long-term trend remains under pressure with prices near the 200-period SMA.
• Key Levels: Support at 1.2800 (20-period and 100-period SMA) and 1.2761 (50-period SMA), and resistance at 1.2827 (200-period SMA) and 1.2850 (recent highs).
• Momentum: The Williams %R indicates the market is neutral, neither overbought nor oversold conditions.

The technical picture is cautiously bullish. 🐂

This market structure suggests that while the pair experienced a significant correction from mid-July to early August, it’s now showing signs of a potential trend reversal.

The recent price action confirms this. After a strong bullish phase, a corrective move, and a potential double bottom chart pattern formation, the pair is now showing signs of recovery.

The break above all SMAs and the formation of higher lows are bullish signals and provide an upward bias. However, the resistance around 1.2850 and the consolidation phase indicate that the market is at a critical juncture.

👀 Keep an eye on…

Traders are likely watching closely to see if this recovery can sustain and break above recent highs, or if it will face further resistance and potentially reverse.

You should be cautious as the market structure is in transition, and wait for clear breakouts or breakdowns for confirmation of the next significant move.

The key levels to watch are the recent high around 1.2850 as resistance and the cluster of SMAs (particularly the 20 SMA at 1.2800) as support.

A convincing breakout above 1.2850 could signal a continuation of the bullish trend, while a fall below the SMAs or a clear breakdown below 1.2750 would indicate that the recent upward move was a correction in a larger downtrend.

When analyzing markets, it’s crucial to consider multiple factors beyond technical analysis, including fundamental analysis, market sentiment, intermarket correlations, and scheduled news events.