GBPUSD could turn from its recent uptrend, as the pair is forming a reversal pattern on its 4-hour chart. Price is in the middle of completing the right shoulder of the head and shoulders formation and might be gearing up to test the neckline around the 1.5100 major psychological support.
A break below the neckline would confirm the potential long-term downtrend, which might last by around 700 pips or the same height as the chart pattern. This could take price down to the 1.4400 mark or at least until the previous lows at 1.4600.
On the other hand, if the 1.5100 mark holds as strong support and keeps losses in check, GBPUSD could bounce up to the nearby resistance at 1.5500 instead. Stochastic is already moving out of the oversold region, indicating that sellers are exhausted and that buyers might take over. Stronger upside momentum could lead to a test of the previous highs at 1.5800.
The path of least resistance is to the downside since the US just printed an impressive May NFP report and allowed traders to price in expectations of a Fed rate hike for September. Underlying data supported further positive momentum for the US jobs market, as the participation rate improved while average hourly earnings showed higher than expected gains.
Meanwhile, the UK has just printed a negative headline inflation reading for April, suggesting that the drop in price levels might continue to weigh on overall growth. This was followed by a bleak services PMI reading, suggesting that the industry could have a smaller contribution to overall economic activity for the current quarter. The BOE isn’t too hawkish with their policy bias just yet but has emphasized that their next move is still likely to be a rate hike.
By Kate Curtis from Trader’s Way