Charts Confirm Pound About to Stage a Recovery Against the Dollar
The GBP to USD conversion rate has found support at a key level and is bouncing. Could this provide the basis for a rebound, or is the pair set to push lower and retest the 1.3833 lows?
The GBP/USD pair has broken back above a major support level reducing the bearishness of the technical outlook.The exchange rate has now broken back above the 'neck-line' (blue line on chart below) of an inverse head and shoulders bottom pattern.
It also broken back above 1.4089 resistance, which was expected to cap rebounds.
On Thursday the pair formed an up-day with a longer-than-average range and a close in the top half of the range:
This highly bullish day brought the exchange rate firmly back above the neckline and was itself a sign that there will probably be more upside on the horizon.
The pair is now currently pushing up against resistance from the old trend-line connecting the top of the head and the right shoulder of the inverse head and shoulders (yellow line on chart below).
If it manages to break above that line as well, marked by a move above the 1.4350, it will probably continue higher to a target at the 50-day moving average at just above 1.4430.
The MACD indicator, which measures momentum, has fallen below the zero line indicating the start of a bearish trend.
Latest Pound / US Dollar Exchange Rates
  | Live: 1.3336▲ + 0.07%12 Month Best:1.3789 |
*Your Bank's Retail Rate
| 1.2882 - 1.2935 |
**Independent Specialist | 1.3149 - 1.3202 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
1.4000 important
Most analysts agree that 1.4000 is key and that as long as the exchange rate remains above 1.4000 there is an improved chance of a rebound, however, a move below - or below 1.4083/05 in the case of Commerzbank and 1.3980 in the case of Lloyds' - would be major precursors of more weakness, resulting a move back down towards the 1.3838 lows.
Ideally Lloyd's Robin Wilkins wants to see a move above 1.4205 for confirmation of an extension to 1.4300.
We also note price rises will probably be capped at 1.4283, by the S1 monthly pivot, a level used by traders to counter-trade the trend, putting pressure on the exchange rate and sometimes forcing it back down, or leading it to consolidate.
Hantec's Richard Perry suggests market action over the last 24hrs "poses questions"
About the strength of the down-trend, and raises the possibility of a bullish recovery:
"The strong bull candle on Cable from yesterday poses questions about the recent sell-off but there is much more that needs to be done before a turnaround can be considered as sustainable."
He sees rallies capped at 1.4330 by "new resistance", but gives no indications at what point he would turn bullish on the pair.
Instead he argues more downside is probable as rallies are being 'sold into':
"The fact that a bull candle of over 100 pips has hardly done anything to really improve the outlook goes to show the magnitude of the sell-off. Even looking at the momentum indicators which remain firmly in bearish configuration, with the RSI falling over the past 3 weeks, the MACD lines now negative and the Stochastics barely even registering yesterday's rebound. The early fall back in the Asian session today suggests that rallies are being sold into."
Our own view is that a break below the 1.3990 level would probably indicate a continuation to 1.3850, just above the February lows.
