Trading Recommendations and Analysis for GBP/USD on December 18. Pound Quickly Recovers from Setback

[Ben Graham]

Analysis of GBP/USD 5M

The GBP/USD currency pair began on Wednesday with a sharp decline. This drop in the British currency was entirely justified, as the only important report of the day—the UK inflation report—came in significantly below forecasts. While a slowdown in inflation is generally positive for the economy (or at least for consumers), it also greatly increases the likelihood of a rate cut by the Bank of England at its upcoming meeting, happening today. Consequently, the market priced in monetary policy easing, and in the second half of the day the pound unexpectedly began to recover, returning to its initial levels.

We believe the pair's growth in the second half of the day signifies several things. Namely, the market still recognizes that the dollar lacks prospects. Thus, we witnessed yet another correction and nothing more. We may see another correction today, as fundamental and macroeconomic factors could trigger a new decline in the pair. After all, today not only marks the BoE's meeting but also the release of the U.S. inflation report. Inflation data is needed to create a comprehensive picture of the U.S. economic situation.

From a technical standpoint, the upward trend remains intact despite the pair's significant decline earlier this week. We think that "flights" may continue today, but they will not change the overall trend. The pound has already corrected too much over the last six months, and this was a correction rather than a trend, as can be clearly seen on the daily timeframe. Therefore, we still anticipate upside movement.

In yesterday's 5-minute timeframe, at least two strong signals were generated. First, the pair consolidated below the Kijun-sen line, allowing for short positions to be opened. Then, with minimal deviation, the level of 1.3307 was reached, followed by a rebound that allowed the pair to return to its initial positions in the range of 1.3369-1.3396. Thus, traders had the opportunity to open two trades, both yielding decent profit.

COT Report

The COT reports for the British pound show that commercial traders' sentiment has been constantly changing over the last few years. The red and blue lines representing net positions of commercial and non-commercial traders frequently intersect and are mostly close to the zero mark. Currently, they are almost at the same level, indicating roughly equal numbers of long and short positions.

The dollar continues to decline due to Donald Trump's policies, as shown on the weekly timeframe (above). The trade war will continue in one form or another for a long time. The Federal Reserve will definitely be lowering rates in the next 12 months. Demand for the dollar will, in one way or another, be decreasing. According to the latest COT report (dated October 28) for the British pound, the "Non-commercial" group opened 7,000 buy contracts and 10,500 sell contracts. Thus, the net position of non-commercial traders decreased by 3,500 contracts over the week. However, this data is outdated, and fresh data is unavailable.

In 2025, the pound experienced significant growth, but it's essential to understand that the reason for this was one thing: Donald Trump's policies. Once this reason is mitigated, the dollar may begin to rise, but when this will happen is uncertain. It doesn't matter how rapidly the net position of the pound rises or falls (if it's falling). For the dollar, the position is declining anyway and generally at a faster pace.

Analysis of GBP/USD 1H

On the hourly timeframe, the GBP/USD pair continues to form an upward trend. We believe that medium-term growth will continue regardless of the local macroeconomic and fundamental backdrop. Data on the U.S. labor market and unemployment have been released, but traders are yet to see the U.S. and UK inflation reports, as well as the results of the BoE meeting. From a technical perspective, the price failed to consolidate below the Senkou Span B line, which is significant.

For December 18, we highlight the following important levels: 1.2863, 1.2981-1.2987, 1.3042-1.3050, 1.3096-1.3115, 1.3201-1.3212, 1.3307, 1.3369-1.3377, 1.3437, 1.3533-1.3548, and 1.3584. The Senkou Span B (1.3308) and Kijun-sen (1.3383) lines may also be sources of signals. A Stop Loss level is recommended to be set to break even if the price moves 20 pips in the correct direction. Ichimoku indicator lines may shift throughout the day, which should be considered when determining trading signals.

On Thursday, the BoE meeting will take place in the UK, and the U.S. inflation report will be published. Both events are extremely significant and can provoke strong and unexpected market reactions. Volatility today may be very high.

Trading Recommendations:

Today, traders may consider selling if the price consolidates below the 1.3369-1.3377 area, targeting 1.3307. Long positions will become relevant if the price consolidates above the critical line with targets of 1.3437 and above.

Explanations for Illustrations:

• Support and resistance price levels are marked by thick red lines, where movement may conclude. They are not sources of trading signals.
• The Kijun-sen and Senkou Span B lines are Ichimoku indicator lines transferred to the hourly timeframe from the 4-hour timeframe. They are robust lines.
• Extremum levels are marked by thin red lines, where the price previously bounced. They are sources of trading signals.
• Yellow lines represent trend lines, trend channels, and any other technical patterns.
• Indicator 1 on the COT charts shows the size of the net position of each category of traders.

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