Pound-to-Dollar Rate Bearish Short-Term, but Bullish Thereafter

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- Short-term downtrend still intact

- Bearish commentary and data weaken Sterling

- But medium-term signals warn of reversal higher

The Pound-to-Dollar rate is continuing to sell-off after a combination of pessimistic talk from Bank of England Governor Mark Carney and disappointing PMI data, led to a revision in UK growth expectations.

Markets now pric in a +50% probability of the BOE cutting interest rates to support the ailing economy when before they had seen chances skewed in favour of a rise.

The Pound - sensitive to interest rate expectations - weakened on the news, spurring a continuation of the short-term downtrend.

The 4-hour chart below now shows an entrenched downtrend unfolding, which given the old adage that ‘the trend is your friend’ is more likely to extend than not, providing a technical simulacrum to the increasingly bearish fundamentals.

The pair is expected to extend down to a fresh bearish target at the December 2018 lows conditional on a break below the 1.2550 level.

Momentum is moving down in lockstep with price, supporting the bearish case, as illustrated by the RSI momentum indicator in the lower pane.

The 4-hour chart is used to assess the short-term trend which means the outlook for the next 5 days, but what of the longer-term outlook?

The daily chart is more mixed and strongly cautions bears against getting too exuberant.

Both the main interpretations indicate a good chance the exchange rate will eventually turn around and start rising in the medium-term, defined as the next one to five weeks.

The chart above shows the same scenario as is on the 4 hour chart only on a higher timeframe. It shows the trend continuing to the December lows. It also suggests a price pattern may be forming called an ‘ending diagonal’.

These patterns are bullish. They occur at the end of long-term downtrends and mark the start of a reversal. They are normally composed of 5 waves. That would indicate this pattern is close to completion.

If this is the case, the exchange rate should fall to the December lows but then bounce back up to the upper trendline of the pattern at 1.2800 over the medium-term.

A break above the upper trendline from there would be a further bullish sign and suggest a major reversal was underway.

This is not the only valid interpretation of the daily chart, however, for it is also possible the pair may be forming a different type of bullish price pattern called an inverse head and shoulders (H&S).

These patterns also form at the end of long-term downtrends are made up of three consecutive trough lows the middle one of which is the lowest.

The pattern thus formed resembles an upside-down head with two shoulders either side.

It is also a reversal pattern and a break above the ‘neckline’ which connects the intervening peaks of the pattern is the confirmation signal that the trend is reversing.

If it is the case that the pair is forming such a pattern then current decline is likely to petter out very soon as it is forming part of the right shoulder. It would mean the pair would soon rotate and start going higher and will not fall all the way down to the December lows.

Assuming the inverse H&S hypothesis, the outlook is for the current move to pivot and a rally to evolve higher, to a target at 1.2765 and the 50-day MA. A break above that would then see the pair continue higher to the next upside target at 1.2900.

The RSI momentum indicator in lower pane actually supports this hypothesis since it is showing momentum steadily rising in support of more upside.

A wider view of activity shows how the pair appears to be reaching a long-term low and how a rebound could quite easily reach the major trendline at 1.3000 over time, although a break above that would be required for greater gains.

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