Pound / Dollar Rate Could be at Start of New Major Downtrend

- GBP/USD has broken below a major trendline
- Follows BoE hesitancy in raising interest rates
- Third trendline break of the uptrend since March 2020
- This is significant according to analysts
- Brexit woes may provide the catalyst for the change in trend

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The Pound to Dollar exchange rate is trading at 1.3550 at the time of writing and the outlook is bearish from both a technical and fundamental standpoint.

Technically it has broken below a major trendline, whilst from a fundamental perspective renewed Brexit concerns are weighing.

The pair broke through a major multi-year trendline last Thursday after the Bank of England kept interest rates unchanged at its monetary policy meeting when markets had been expecting a 0.15 basis point rise.

The trendline break was a game-changing moment for the pair as it signified the third major trendline break for the uptrend from the March 2020 lows.

Above: Daily GBP/USD.

• GBP/USD reference rates at publication:
  Spot: 1.3550
• High street bank rates (indicative band): 1.3177-1.3277
• Payment specialist rates (indicative band): 1.3429-1.3483
• Find out about specialist rates, here
• Or, set up an exchange rate alert, here

According to technical analysts, the third time price breaks below a trendline in an uptrend is significant as it is a strong sign the broader trend is changing.

In this case it suggests GBP/USD may be entering a long-term downtrend.

Following Friday’s post trendline-break lows - reached after a strong Non-Farm Payrolls result kicked the exchange rate even lower - the pair reversed and rose back up to the major trendline again, retouching it for a second time.

Above: Weekly GBP/USD chart.

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A retest of a trendline after a break is a common occurrence. Usually it simply signifies price is returning for one last ‘air kiss’ goodbye before tumbling to fresh lows.

Traders see it as the perfect opportunity to get a low risk/high reward short order in, placing stops just above the trendline.

Of course there is still a possibility the exchange rate can mount a stronger recovery and break back above the trendline to continue its uptrend, however, this is less usually the case.

Often whether the break is definitive depends on whether the fundamental outlook for the asset has changed significantly.

It does, however, suggest we may be at a make-or-break moment for the pair from a technical standpoint.

Will it turn around at the trendline and continue falling, or break back above it?

One headwind to Sterling is the possibility the British government will trigger article 16 of the Northern Ireland agreement, essentially ending the current arrangement in which goods are checked at ports in the Irish sea.

If the UK government were to take this drastic move the EU has threatened to retaliate by imposing punitive tariffs on UK goods entering Europe and effectively begin a trade war.

If this were the case it would be very detrimental to the pound and provide the fundamental catalyst needed for an extension of the break, and the evolution of a new long-term downtrend to fresh lows.

From a technical standpoint, confirmation of a deeper downtrend evolving would come from a re-break below the Nov 5 lows at 1.3424.

Such a move would signal a probable continuation down to an initial target in the 1.3200-50 area and the establishment of a new overall bear trend for the pair.