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Pound-to-Dollar Rate's June Rally Runs Dry

Foreign exchange analysis

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- GBP/USD recovery halted at 1.2750-70

- Pair now more likely to resume decline

- City Index analyst targets 1.2560

The GBP/USD exchange rate is tipped to resume its overarching downtrend after bumping up against an unbreakable ceiling of resistance, according to analysis.

After falling all through May to the 1.2559 lows on the 31st the pair rebounded and traded for much of the first half of June in the 1.27s, suggesting to some that perhaps the sell-off might be coming to an end.

However, the exchange rate failed to break any higher than the 1.27s suggesting that the pair might have been experiencing something of a short-term relief rally.

GBP/USD's inability to break any higher confirms resistance in the market located at 1.2750 through to 1.2773, according to Matt Simpson, an analyst at City Index.

GBP to USD City Index analysis

More specifically this resistance is composed of the February lows at 1.2773 and the 78.6% Fibonacci retracement level of the March downtrend at 1.2750.

Chart prices in financial markets often respect former lows and these levels then act as support and resistance zones capping or supporting future price activity.

GBP to USD city index

They also mysteriously respect retracement levels from preceding moves, specifically situated at 78.6%, 61.8%, 50% and 36.8%. These percentage levels are linked the Fibonacci sequence, a mathematical law, which supposedly rules forms in nature and even financial markets.

The two-touch high, highlighted by the two red circlets in the top chart, is a further sign the pair might be reversing and going lower. It is similar to the Japanese candlestick reversal pattern called a ‘tweezer top’, which is a fairly reliable bearish indicator.

Overall Simpson expects the market to fall back down to 1.2560 low subject to confirmation from a break below the 1.2660 level.

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Hantec Markets' Perry More Neutral

A more neutral view is propounded by Mathew Perry, a market analyst at FX broker Hantec Markets, although he too is overall marginally bearish as well.

The pair has now established a range bound market tone within a 110 pip range which it has been in for 8 days and could endure.

Strong resistance at the same 1.2750-70 highs underscored by Simpson, but also strong support at 1.2650, are keeping the pair in a range.

“Cable remains stuck in its 110 pip trading band that is now into its eighth session. The resistance at $1.2755/60 is mounting, but equally, the support at $1.2650 is also still intact,” says Perry.

Perry's analysis

If there is a bias it is to the downside. Three different types of momentum indicators - Stochastics, MACD and RSI - are suggesting the pair is more likely to fall than rise.

The combination of Thursday’s negative 'downday' and a bearish cross from the stochastic indicator (circled), suggests more downside on the horizon.

Neither the MACD nor the RSI are looking particularly bullish either.

“With MACD lines struggling for upside traction and RSI stuck in the low 40s, this is not a chart that looks to be ready to break higher,” says Perry.

At the same time, however, Perry notes a “lack of selling pressure” which would be needed to trigger a breakthrough to the downside.

Nevertheless, his call is for a break below 1.2650 to open a channel down to a target at 1.2555.

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