The pound has rallied strongly over the past month, driven by a weakening dollar, but after the release of UK gross domestic product data, the outlook for the UK economy was downgraded. This prevents the continuation of the rally, and recent price action signals a potential test of the highs of the historical support zone around 1.177 and a potential descent to the bottom of the zone around 1.142.
GBP/USD 1D CHART
Despite breaking out of the descending channel, the pound failed to gather momentum to continue the upward movement and formed the classic double top reverse pattern with a neckline of 1.2053 that is being tested today. This is supported by the 9 on a bullish cycle ending sequence and the start of a new bearish cycle with a printed 1, which will be confirmed after price closes around these levels at the end of today’s session.
Demarker is moving steeply in a downward direction, which signals the strength of the movement, and entering the oversold zone will complement the signal.
The measured movement of the double top is a drop to 1.175 and a break of this level suggests a continuation of the decline for a test at 1.142
On August 16 (Tuesday) the UK unemployment report will be released and on August 17 (Wednesday) the CPI report will be released. An increase in volatility is expected these days, we will also get guidance on the direction of the pound depending on the results, especially the CPI.
Analysts’ expectations are an increase in inflation to 9.8% compared to 9.4% in the previous month. A higher than expected reading will be negative for the pound and this will reinforce the continuation of the downtrend. Lower than expected but higher than the transition month will also be negative for the currency.
The expectations of the banks are a continuation of the decline in Q3 and a potential formation of a bottom at the beginning of Q4.
Expectations for Q3 are prices around 1.19 with a potential upside to 1.22-1.25 but we may first drop to 1.13 estimates before a more sustained uptrend begins.
Analysts’ expectations for the week range between 1.22 – 1.19 with the highest rating around 1.20.
Alternatively, a failed breakout of the double top formation’s non-clinic and a continuation of the price in an upward direction, surpassing the recent high of 1.2298, would indicate a continuation of the uptrend and a test of the high levels around 1.242 / 1.27 / 1.29.
We place the stop loss zone above the last peak and above 100MA, measured against the size of the margin account.
Dealer Anatoliy Pavlov