GBP/USD began rising after sweeping liquidity below the latest bearish swing and has since gained more than 200 points. Over the past three days, the pound has posted a strong advance, which could invalidate Imbalance 30, as it has failed to produce a convincing reaction. This would be the first step toward the formation of a bullish trend. In addition, the first bullish imbalance in a long time formed yesterday. Going forward, it will act as a support zone and provide buy signals. It has not yet been marked on the chart because it coincides with Imbalance 30. Nevertheless, it is present.
Finally, there is another important point. The reversal in favor of the pound did not occur after strong UK data or weak US data. It followed three strong US inflation reports that favored the dollar and could easily have supported the bears once again. Thus, we have once again seen that traders are responding to the news backdrop in a rather unusual way. A report that is positive for the dollar can trigger either a rise or a decline. A complete absence of news can prompt bearish attacks even when there is no clear reason for them. Key reversals occur not after major events, but after liquidity sweeps.
It should be noted that traders expect the Bank of England to tighten monetary policy two or three times, while the Federal Reserve is expected to do so only once or, at most, twice. The dot plot also points to one policy tightening, while the latest FOMC minutes confirmed that most central bank policymakers expect just one 0.25-percentage-point rate hike. Of course, the outlook for 2027 remains uncertain, but this is the current consensus forecast, weighted by market expectations. As a result, the Bank of England could ultimately raise rates more aggressively than the Fed over the coming months, which would clearly not support further gains in the US currency.
If the Fed had not decided to raise interest rates in September and signaled its readiness to continue tightening monetary policy, a decline in the US currency would have been expected a month ago. That remains the expectation now. The pair has reversed in favor of the pound, and the remaining step is for new bullish patterns to form, allowing bulls to open long positions. In the long term, the outlook for the pound remains bullish.
Do the bears have any further prospects? In my view, not many. Over the past month and a half to two months, the bears seem to have achieved the impossible, pushing the dollar to levels that are exceptionally high by recent standards. It is worth remembering that the market has had reasons to buy the dollar recently, but there have also been reasons for the British currency to rise, which traders simply overlooked. A reversal of the previous move may now begin, and this movement could be much more justified by the underlying conditions than the preceding decline.
On Tuesday, the economic news backdrop supported the bulls, as the UK unemployment rate fell from 4.9% to 4.7%. The other UK reports had little significance for traders after the unemployment data. However, the pound could easily come under selling pressure tomorrow if the Consumer Price Index comes in below expectations. Traders expect headline inflation of at least 3.4% year-on-year and core inflation of 2.7%. The Bank of England will probably begin raising rates at its next meeting regardless, but the lower inflation is, the fewer rounds of monetary policy tightening the UK regulator is likely to undertake.
Overall, the news backdrop remains such that a decline in the US currency is the only long-term outcome that can reasonably be expected. The war between Iran and the United States has not changed this outlook. Geopolitical tensions prompted the market to reconsider the dollar's safe-haven status for several months, but the conflict has already passed its most acute phase. The future course of FOMC monetary policy remains uncertain, and the market continues to anticipate only tighter policy, which is the main reason for the bears' optimism. However, traders are still failing to account for the prospect of monetary policy tightening by the Bank of England, as reflected in several recent speeches by Monetary Policy Committee (MPC) members. Inflation is rising in the UK, as it is worldwide, leaving the Bank of England with little choice but to raise rates as well.
US and UK Economic Calendar
- United Kingdom — Consumer Price Index (06:00 UTC).
On October 21, the economic calendar contains only one event, but it is an important one. The economic news backdrop could affect market sentiment on Wednesday, particularly during the first half of the day.
GBP/USD Forecast and Trading Advice
The long-term outlook for the pound remains bullish. Bears have controlled the market in recent weeks, but the broader trading range is clearly visible on the daily chart. A liquidity sweep below the swing low formed on May 1 triggered a new decline within the horizontal range, while a sell signal inside Inverted Imbalance 27 allowed the decline to continue.
However, liquidity was swept below the June lows, giving the bulls a good chance to regain control. The bearish imbalance could be fully invalidated as early as today, marking the first step toward the formation of a bullish trend. Therefore, traders are advised to wait for bullish patterns and signals that should help the pound return to its August highs.
