Yesterday, the pound started the day on a positive note, reaching a high of 1.3426. UK economic data provided little justification for the rise, so when US data restored demand for the dollar, the gains quickly evaporated. Overnight, the pair declined to 1.3395 before recovering some of its losses. It is currently trading around 1.3412, indicating that the pound and the dollar have returned to a relative balance.
The only significant UK release yesterday was the final manufacturing PMI. This business activity index is based on a survey of purchasing managers, and a reading above 50 indicates sector expansion. The index came in at 52.8, exactly in line with both analysts' expectations and the previous reading. The figure provided no new information, but the absence of a negative surprise was important for the pound. The index remains comfortably above 50, indicating that UK manufacturing continues to expand. This was enough to support the pound initially but insufficient to sustain its gains.
US economic data shifted the balance. The manufacturing ISM index came in at 55.5, compared with a forecast of 54.5. This survey of US factories reflects orders, output, and employment. The higher the reading, the stronger the US economy appears. A strong economy gives the Fed more reason to continue raising interest rates rather than pause, which is why the dollar typically strengthens following such data.
There are no significant UK economic releases scheduled for the first half of today, meaning the pound lacks a domestic catalyst for a sustained move. Inflation, labor market conditions, and business activity typically shape expectations regarding the Bank of England's interest rate and influence the pound's exchange rate. Without fresh data, traders have little reason to reassess their positions, leaving existing positions largely unchanged and liquidity relatively low at the start of the day. Yesterday's PMI has already been priced into the market and is unlikely to generate fresh momentum. The Bank of England's policy meeting is scheduled for Thursday, and the market has already largely priced in a 0.25-percentage-point rate increase to 4.00%. Therefore, the meeting is more of a background factor today than an immediate market catalyst.
The main external factor will be the US midterm elections. All seats in the House of Representatives and approximately one-third of the Senate are being contested. Around 57 million people have already voted early, exceeding the figure recorded in 2022. According to estimates, the Democrats could gain 12 to 25 seats in the House, while the outlook in the Senate remains more uncertain.
Momentum
The key point is that a breakout occurs when the price moves beyond a level and consolidates there, rather than simply touching it.
For the pound, buying opportunities are considered above 1.3412, with targets at 1.3444 and 1.3467, while selling opportunities are considered below 1.3379, with targets at 1.3354 and 1.3324. The price is currently trading exactly at the upper entry level, making this a situation in which a single test means very little. Overnight, the pair rose to 1.3414, just above the level, but immediately retreated. Yesterday's high of 1.3426 also resulted in a pullback. This means that buyers have so far failed to establish a sustained position above 1.3412, and the current market environment provides little reason to expect this to change quickly. There is no UK economic data scheduled, the Bank of England's meeting is still two days away, and the elections are providing support for the dollar. Therefore, buying on a breakout will only be considered after the price firmly consolidates above the level, without rushing into a position.
Selling below 1.3379 is more consistent with the dollar-supportive market environment. However, this level is still far away, 33 pips below the current price, while the overnight low of 1.3395 remains intact. For this scenario to become relevant, the overnight low must first give way, which is unlikely before the US trading session. Most likely, neither breakout will materialize in the first half of the day, and market sentiment ahead of the election results will determine the direction.
Mean Reversion
For the pound, the key resistance level is 1.3425. The strategy involves identifying a false breakout, when the price moves above the level but fails to hold there and subsequently falls back. In that case, selling opportunities can be considered, with a stop-loss order placed above the high of the false breakout. Yesterday's high of 1.3426 coincided almost exactly with this level and was followed by a pullback, demonstrating that the level can trigger a price reversal.
It is 13 points above the breakout level of 1.3412, and the zone between these two levels is where the two strategies overlap. If the pair breaks above 1.3412, reaches 1.3425, and firmly consolidates above it, selling should be avoided. This would confirm a genuine breakout and open the way toward 1.3444. However, if the price moves above 1.3425 but fails to hold there and falls back below 1.3412, breakout buyers will be trapped, creating favorable conditions for selling on the reversal. This distinction can only be established by observing where the price trades several minutes after testing the level, so it is better to avoid reacting to the initial move.
This is the preferred scenario because, in the absence of UK economic data and with the elections supporting the dollar, an upward move lacks fundamental support.
The key support level below the market is 1.3390. It is five pips below the overnight low of 1.3395 and 11 pips above the breakout level of 1.3379. Buying opportunities can be considered if the price briefly breaks below 1.3390 but quickly recovers above it, with a stop-loss order placed below the low of the false breakout. However, if the pair breaks below 1.3390, reaches 1.3379, and consolidates below that level, this would signal a genuine decline, and buying should be avoided.
The overall market environment is unfavorable for this scenario, as uncertainty surrounding the elections is supporting the dollar. Therefore, buying near the lower level is a secondary option, and such positions should not be opened without a clear recovery above 1.3390.
