GBP / USD Rate in New Downtrend as Peaks and Troughs Start Falling

Price action on the Pound to Dollar exchange rate's daily chart is indicating that exchange rate may have reversed trend.

Confirmation came from the pair piercing below the key 1.2590 lows and our studies suggest the trend is probably now down and there is more chance of the move continuing.

Although the pair is currently trading on the S2 Monthly Pivot, a level respected by traders which they often use to fade the trend, the trend has reversed according to peak and trough analysis and it will probably break down and extend lower.

A clear and decisive break below S2, signalled by a move below the 1.2590 lows, would lead to a limited move down to 1.2560 where the 200-day moving average (MA) sits.

The 200-day is likely to provide a very robust level of support and present an obstacle to price action.

MACD, meanwhile, is bearishly below the zero-line, further indicating more losses for the exchange rate.

Theory Of Trends

The break below the 1.2590 lows signalled a reversal based on a form of analysis called Dow Theory, which was pioneered by Charles Dow, often to referred to as the father of technical analysis.

Dow posits that the market moves in waves of buying or selling which depict peaks and troughs.

When the market fails to make a new higher high, however – or higher peak - (in an uptrend) the uptrend is in doubt.

This can happen when a correction occurs, for example, such as when the market pulls back and forms a common a-b-c correction.

After a correction the market starts going up again and eventually makes a new higher high, thus resuming the upwards sequence of peaks and troughs.

If during an a-b-c correction, however, the exchange rate fails to make a new high at the second attempt and then rolls over and makes a new lower low, and that low is below the low of wave ‘c’ then that is the signal that uptrend has reversed, and peaks and troughs will probably start trending down.

GBP/USD did manage to move higher on Wednesday, correcting some of its early week losses.

"However, the risks remain seen still to the downside to test the lower end of important basing support now at 1.2555/45 – the 200-day average and “neckline” support," says David Sneddon, Research Analyst at Credit Suisse.

Credit Suisse would look for this to try to hold.

"However, if removed, this would negate the base and signal a deeper sell-off to test the measured objective from the top at 1.2490, ahead of a more solid price level at the early April low at 1.2365," says Sneddon.

GBP Downside limited on a Valuation Basis says Morgan Stanley’s Redeker

Downside may be limited on a valuation basis according to senior strategist Hans Redeker of Morgan Stanley who recently said that Sterling Pound was long-term extremely undervalued.

Redker wrote that he thought GBP/USD had already priced in a lot of bad news and that more downside was therefore unlikely.

A hard Brexit is priced in at between 1.20-25, according to Morgan Stanley.