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Pound-to-Dollar Rate Pulls Back but Charts say Sterling Could be Ripe to Buy

Pound-Dollar

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- GBP/USD pushed lower on fundamentals

- Technicals continue to maintain bullish bias

- Break higher could still see rate rise to 1.36

The Pound has weakened over the past five days with foreign exchange traders limiting exposure to the currency in anticipation of new Brexit developments, but our technical studies suggest that weakness should be limited in the absence of a major deterioration in Brexit sentiment.

GBP/USD’s decline from the multi-month high at 1.3350 intensified on Tuesday after an EU source said Tuesday's negotiations "had not gone well". The pair briefly fell beneath the 1.3100 level and the 10-day Moving Average (MA) in response.

Renewed Dollar strength has not helped the pair; the greenback rebounded after the ISM Non-Manufacturing index showed a stronger rebound in February. This raised doubts about just how negative things were for the U.S. economy, the data contributed to the GBP/USD falling lower.

GBP to USD falls back into the buyzone

Despite the weaker fundamentals the technical outlook actually continues to look quite constructive. "One of the main advantage when looking at the markets from the perspective of technical analysis is that a narrative is not required to understand market sentiment," explains Piotr Matys at Rabobank.

The pair has pulled back into a zone between the 10 and 20-day MAs which some traders call the ‘buyzone’, because it is the optimum place to buy an asset and re-enter the uptrend. This zone is represented by the grey hatching on the chart above.

The pair has also formed a bullish hammer candlestick (circled) in the buyzone further enhancing the bullish setup. Despite the weakness today, the pair is still tipped to go higher.

GBP to USD weekly chart

The longer-term charts appear to be showing the pair in the process of forming a base from which it may begin appreciating, further reinforcing the bullish technical story.

This base could be an inverse Head and Shoulders (H&S) pattern, visible on the weekly chart. Although the pattern is a little wonky in this case, and far from ideal, it still looks very much like the sort of bottoming consolidation that often appears on charts prior to a change of trend.

Inverse H&S patterns are composed of three trough lows, the middle one of which - the head (H) – being the lowest, and the two either side - the shoulders (S) - of a similar depth. The tops of the intervening peaks set the neckline above which price must break to signal a breakout higher.

Although H&S’s tend to move the same distance higher as their height - as measured from the neckline to the bottom of the ‘head’ – this one might only get as far as 200-week MA at 1.3600, since this is likely to present a substantial barrier to further gains.

The buyzone setup biases the pair to recover from its current pull-back level to the 1.3350 highs. From there we may see a break above 1.3400 as providing strong confirmation that the neckline has been broken and the pair will, therefore, continue up to a target at 1.3600.

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