The GBP/USD pair declined for four consecutive days. As a result of this sharp decline, bears reached Imbalance Zone 18, which represents a bullish pattern. Therefore, bearish pressure may come to an end near this pattern. This week, we saw a convincing reaction from Imbalance 18, including a full 100% fill, a sharp rebound in prices, the formation of a Bullish Engulfing pattern, and a return into Bearish Imbalance 19. However, the bullish momentum essentially faded afterward. Thus, bulls made the first step toward forming a new bullish impulse, but they have so far failed — or perhaps chosen not — to take the second step by invalidating Imbalance 19. What are the chances of this happening? Judging by the reports released this week, they remain relatively low. On the one hand, several major media outlets insist that negotiations between Tehran and Washington are continuing. On the other hand, those same reports indicate that the two sides remain far from reaching a consensus. Therefore, the only conclusion that can currently be drawn is that negotiations are continuing, but at this pace they may continue for a very long time, and I would not expect even an interim agreement to be signed anytime soon. All of this leaves bearish traders in a much stronger position than bulls. We can see that price has effectively become trapped inside Imbalance 19, meaning the market may react to this pattern. In that case, a sell signal would be formed and the downward movement could resume.
The situation regarding a resolution to the Middle East conflict has effectively become deadlocked, while traders no longer understand which direction sentiment may shift next. Today it may favor the bulls, tomorrow the bears. This is precisely the market environment we have observed in recent weeks. At the current stage, confidence in peace in the Middle East and in the removal of the blockade of the Strait of Hormuz has fallen to minimal levels.
In my view, the broader trend remains bullish despite the pair's sharp declines this year. The ceasefire in the Middle East remains fragile, but it is still holding. Naturally, the market cannot rely indefinitely on information that lacks factual confirmation. The Strait of Hormuz remains effectively under dual blockade conditions, while Tehran and Washington continue unsuccessfully attempting to break the deadlock without making major concessions during negotiations. The situation continues to shift alternately for better and for worse. Markets remained highly optimistic for nearly a full month, but last week they were confronted with the reality of the situation.
The current technical picture is as follows. Bullish Imbalance 18 generated a valid market reaction, and if not for Bearish Imbalance 19, I would be preparing for a strong bullish advance. However, Bearish Imbalance 19 formed within a bullish trend, so at this stage I do not consider it suitable for opening short positions. Nevertheless, every trend eventually comes to an end. The downward movement could resume in the event of another collapse in negotiations between the West and the East.
The economic news background on Friday remained very weak. In the United Kingdom, today's retail sales report disappointed bulls just as much as the previous UK reports released this week, including inflation, unemployment, and business activity data. Bullish traders once again managed to prevent a deeper decline in the pair, but their strength is not unlimited.
In the United States, the broader fundamental backdrop remains such that, from a long-term perspective, it is difficult to expect anything other than continued dollar weakness. Even the conflict between Iran and the United States changes little in this regard. Geopolitical tensions temporarily restored demand for the dollar as a safe-haven asset for roughly two months, but the long-term outlook for the U.S. currency remains difficult. The U.S. labor market continues to weaken, the economy is approaching recessionary conditions, and unlike the ECB and the Bank of England, the Federal Reserve is not expected to tighten monetary policy in 2026. In addition, four major protest movements against Donald Trump have already taken place across the United States, while the eventual departure of Jerome Powell could further worsen the outlook for the dollar if the FOMC under Kevin Warsh adopts a more dovish stance. From an economic standpoint, I currently see no strong basis for sustained dollar growth.
May 25 contains no significant events on the economic calendar. Therefore, the economic backdrop is unlikely to influence market sentiment on Monday.
The long-term outlook for the pound remains bullish. The Three Drives pattern warned traders about the beginning of the upward movement, after which three bullish patterns and three bullish signals were formed. Last week, geopolitical developments weakened the bulls' previously optimistic outlook, but they still retain an opportunity to maintain control within Imbalance 18. To achieve this, bulls must invalidate Imbalance 19 and receive supportive geopolitical news. My target for the pound remains the 2026 high at 1.3867. I will only begin considering a bearish trend scenario if Imbalance 18 is invalidated. In that case, bearish patterns would come into play. Until that happens, I continue to expect further upward growth.
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