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Pound-to-Dollar Rate Rebounds, but Break Below January Lows is a Very Bearish Red Flag

Pound to Dollar

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- GBP/USD has broken below the January lows

- This suggests more downside

- Converging momentum and valuations suggest bears should be cautious

Sterling trading at around $1.2483, up a decent 0.45% on the day but the gains are yet to overturn the 0.72% decline recorded so far this week.

Despite the gains over the past 24 hours studies of the charts suggest the pair will probably continue declining in its established downtrend over the next five days.

The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair rebounding after reaching new lows for the year.

GBP to USD four hour short term

Although the rebound looks quite strong the same thing happened last week and that time the overarching downtrend took over and pushed the Pound lower again.

Whilst we are at extremely low levels historically speaking and many analysts are saying that the Pound is looking increasingly attractive at these levels the trend trumps all other considerations and there is still a risk the pair plumb new depths.

Nevertheless, more downside would be subject to confirmation from a break below the existing 1.2382 July 17 lows.

Assuming those are broken we can expect a probable continuation down to the next target at 1.2300 based on the length of the previous leg lower, which we have extrapolated lower, given the tendency of financial markets to adhere to symmetry.

Of course, before it goes lower, there is a possibility that the exchange rate could continue rising as the current rebound plays out.

The trendline at about 1.2520 is likely to resist further upside, however, and there is an increased risk that the pair could rotate and move lower at that level.

The daily chart shows how the pair has just fallen back down to a key historic level at the January lows and has actually pierced below them.

Daily GBPUSD

Although the short-term trend is bearish and this would normally be enough for us to forecast a continuation lower, the combination of the fact that the RSI momentum indicator is converging bullishly with price, that the pair has just touched a key level at the January lows, and that the pair is at a historically low level in general, suggests bears should exercise caution.

The fact the RSI is converging with price - meaning it is failing to make new lows when price does - suggests waning downside momentum and the potential for a sideways market to form between around 1.2450 and 1.2550.

If it does manage to break below the July 17 lows at 1.2382, however, there is the potential for a continuation down to a target at the 1.2145 March 2017 lows.

The daily chart is used to provide an indication of the medium-term outlook which includes the next week to a month ahead.

The weekly chart shows how significant the break below the January lows is (circled) since it now changes the whole look and feel of the chart and suggests the trend of rising peaks and troughs, which started at the 2016 lows may be broken.

Weekly GBPUSD

From here there is now a much greater bias for more downside, potentially all the way down to the circa 1.2000 lows of the end of 2016, at least in the long-term.

Of course, for this to happen a major catastrophic event would be required as a fundamental driver for the weakness since the Pound is already at extremely low levels as it is.

This may seem unlikely at the moment but the chart suggests a new underlying technical weakness which was not there a few days ago and makes the advent of such an event more likely.

The weekly chart is used to give an idea of the longer-term outlook, which includes the next few months.

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