South African Rand / Pound: GBP/ZAR Bounce Possible

The Pound to Rand exchange rate (GBP/ZAR) is falling towards its three-year lows as the long-term downtrend takes over and starts driving the exchange rate down again.

The weekly chart below shows that the pair bottomed in October and since then has been moving in a broadly sideways movement.

Over the last nine weeks’ losses have outweighed gains and the pair has fallen from range highs back down towards the 1.1628 lows.

The fact the pair is in a long-term downtrend biases us to expecting an eventual break to the downside, with the next downside target at 1.1600.

Looking at the price action sectioned off in the black box, however, suggests a possibility further downside may be delayed.

The chart below shows the price action sectioned off in a box on the larger chart in more detail.

The reason it is important is because the most recent move lower, spanning the last nine weeks, has formed a pattern called a measured move, or ABCD pattern, which has been drawn on the chart below.

Measured moves are composed of three waves where move A-B is equivalent to C-D.

The chart below shows an example of a measured move on a stock called Weyerhaeuser Co, but these patterns appear in all financial markets.

Measured moves reach completion when the first and third wave are the same length as in the example above on Weyerhaeuser Co and the recent move on ZAR.

On completion, the asset almost always rotates and rallies.

The useful thing about this is it means the next move on GBP/ZAR is likely to be up, and we can forecast that with a higher than average degree of probability.

Although there are no bullish signs yet we know it will probably rally in the next few weeks.

Whilst is not possible to know how long the rally will last or how high it will go, it is likely to last for at least for a few weeks, and probably will rise to at least 1.1725 before there is a risk of the downtrend resuming. 

The MACD indicator on the wider range chart at the start of the article also supports a bounce as it is converging bullishly with pair.

This means it is rising whilst the exchange rate is falling.

The non-confirmation indicates that down-moves lack momentum and is a sign the pair might be vulnerable to a rebound.