Midweek GBP/USD Outlook: Potential for Major Reversal Higher

The Pound to Dollar exchange rate (GBP/USD) has fallen 2% over the course of the past month, but it appears to be reversing and is pointed higher.

The pair is currently trading at 1.2930 having recovered from lows towards 1.2780 on August 24.

This reversal is enhanced and given more credence because it occurred at the intersection of two major trendlines - 'A' and 'B' on the chart below.

Both these trendlines appeared to provide a supportive 'crook' for the exchange rate so as to enable it to stall, rotate and move higher.

Such was the strength of the rebound which followed that we expect it to continue despite yesterday's bearish shooting star candle, "leaving a question mark over the near term recovery," analyst Richard Perry at Hantec Markets described it.

Nevertheless, he is overall quite optimistic, saying that if the market can stay above $1.2930 it would, "help to rebuild confidence with a move back above $1.2978 re-opening the upside once more," says Perry.

Although, he adds the proviso that, "the market looks in the balance though for now."

Karen Jones, a technical analyst with Commerzbank is bearish the pair, on the other hand, seeing the 1.3267 recent highs as forming a 'major top'.

Her short term trend, that is 1-3 week view is that:

"We are looking for a slide back to the 1.2775/59 support zone.

Long term she sees more downside as the trend extends lower.

Technical analyst Robin Wilkin at Lloyds Bank Commercial Banking concurs also saying the market has formed a major top at 1.3270 and that the pair is probably forming a 'lower-high' step down.

"In the short term we believe 1.3270 was a meaningful top for a move back towards 1.26-1.25 medium term range supports. As such, the 1.2950-1.3100 region is the ideal area for a lower high to develop," says Wilkins.

We are however more inclined to side with Perry and adopt a more constructive view.

We believe the exchange rate will move higher because of the already strong lift off move from the 1.2771 lows, over the last four days, which we cannot see realisitically being reversed very easily.

We expect the pair to rise higher towards a target at 1.3100, assuming the market can break clearly above the 50-day moving average at 1.2959.

A break above the highs of the shooting star at 1.2978 would provide confirmation of such a move.

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