The British pound has been struggling to hold onto gains over recent weeks against the US dollar as any upside rallies have quickly fizzled out in the face of a more uncertain global economic backdrop.
Retail sales and CPI inflation data from the United Kingdom economy and risk-off trading sentiment in broader financial markets are likely to be key focuses for sterling traders this week.
The GBPUSD pair has had a strong correlation with the S&P 500 over recent years and tends to perform poorly when this index is starting to slide. Monday and Tuesday of this week were classic case studies of this dynamics.
With sterling under pressure it is also time to look at the short-term and also the longer-term price trend. Technical analysis shows that the short-term trend is bearish below the 1.3850 level, while the over trend is only bearish below the 1.3770 level, which is the location of the pair’s 200-day moving average.
Should we see the overall trend turn bearish then the GBPUSD pair could slip towards the 1.3670 level, and possibly the former monthly trading low. If the short-term trend turns bullish alongside the current long-term bullish trend then I suspect we could see another challenge towards the 1.4000 level.
According to the ActivTrader Market Sentiment tool some 63 percent of traders now have a bearish bias towards the GBUSD pair. The bearish sentiment skew is mildly bullish as we do usually look to trade in the opposite direction of the retail crowd when looking for sentiment trades.
GBPUSD Short-term Technical Analysis
Looking at the four-hour time frame the GBPUSD pair has formed a large, inverted head and shoulders pattern, with bulls needing to move the price back towards the 1.4000 level to activate the bullish pattern.
It is also noteworthy that a significant amount of bullish MACD price divergence is present until the 1.4000 level. At some point it is likely that the GBPUSD pair is going to heads towards the 1.4000 level as the MACD divergence reverses.
GBPUSD Medium-term Technical Analysis
According to the daily time frame a much larger inverted head and shoulders has been forming in the background, with the price needing to reach the 1.4400 level to officially confirm the structure of the pattern.
The pattern would be extremely large if it forms, as it can be formed from the 2018 high to the 2020 trading low. This would mean that the pattern holds nearly 3,000 points of upside potential.