Pound-to-Dollar Rate: Potential for More Gains on Bullish Momentum Indicators

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- GBP/USD is showing strong bullish momentum on the charts

- This follows a bullish break above the April trendline

- Together they suggest enhanced chances of more upside

Momentum is looking increasingly constructive for the Pound-to-US Dollar exchange rate, adding credibility to the recent recovery from off the 1.26 lows.

The RSI indicator - which measures momentum - is at levels commensurate with an exchange rate in the upper 1.31s, which is much higher than the current 1.28 spot level, suggesting the pair should be higher.

The RSI has also formed a, sort of, 'bullish pennant' pattern - the name coming from the pennant flags which flew in medieval times - and this tells the practised eye that momentum is probably about to rise; the inference is that this will reflect a similar rise in the underlying exchange rate.

It is possible to predict the length of the rise in RSI using the length of the 'pole' section of the pennant: the move after is usually of the same or a similar length. This suggests momentum could reach at least the RSI 60 level, and probably infers a strong up-move in the underlying asset too.

Taken together with the recent break above the trendline from the April highs, it adds evidence to the case for a bullish reversal in the trend. Since trends have a tendency to extension rather than reversal, this further suggests a bullish bias for the exchange rate.

From here we see an increased probability of a move up to a target at 1.3040 materialising and the level of the 50-day MA.  A break above the 1.2932 highs would provide confirmation for the move higher.

The 50-day is likely to obstruct the trend from extending any higher. Traders tend to use large MA's as places to fade the market and prices often pause, pull-back or even reverse at or near them. Thus the 50-day provides a good upside target for the next move higher.

The pair may go even higher, however, according to one reliable method for forecasting the move following a trendline break, which is by taking the length of the move prior to the break (x) and extrapolating it higher after the break (y), as this indicates an upside target of 1.3130.

Nevertheless, because moving averages are such formidable obstacles they always take precedence as targets so the 50-day at 1.3040 remains the initial goal.

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