Pound / Australian Dollar: Technicals Hint at Further Recovery

The Pound to Australian Dollarexchange rate has been trending lower since its May highs but has just encountered a major trendline drawn from the pair's October lows and is bouncing.

The question now on trader's minds is whether the downtrend is changing and reversing, or whether the pair is likely to break below the October trendline and go even lower.

Today's bullish activity seems to indicate that the trendline is holding and the pair could reverse and start to move higher - but is there any other evidence to support a recovery?

The MACD momentum indicator is converging with price action, which means it has failed to make a new low along with the exchange rate, at the most recent August 24 lows.

This means the pair lacks downside momentum, and is an indicator the downtrend may be running out of steam, however, on its own, it's not enough to suggest a reversal.

What is potentially a stronger sign of a turnaround for GBP/AUD is the possible inverse head and shoulders pattern on the MACD which has formed over the last three troughs.

An inverse head and shoulders are formed from three troughs when the middle trough is markedly lower - the head - than the other two either side, which is at about the same level - the shoulders.

Such a pattern on a price chart is very bullish, but it can also appear on momentum studies as well, and if the pattern on the MACD of GBP/AUD is an inverse head and shoulders then that is a strong bullish reversal sign for the pair too.

Below is a perfect example of such a pattern, noted on a stock chart. The confirmation trigger for an inverse H&S comes from a break above the neckline which is the line touching the intervening peaks of the pattern (red).

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.