GBP/ZAR: Midweek Review, Pulling-Back to 16.80

The Pound to South African Rand has formed a short-term top which is currently breaking lower.

Looking at the four-hour chart we can see that the pair has formed a possible ending diagonal pattern -  a very volatile bearish ending pattern – from which it has already broken out of.

The divergence between momentum and the exchange rate, which is as a result of momentum not corroborating the chart’s repetitive highs supports the short-term bearish outlook.

The exchange rate has, in fact, started breaking even lower as I write.

The pair has already fallen beneath the 17.10 lows on its way south to a target at 16.80, based on the extrapolation of the height of the pattern at its widest part lower, from the point of the break.

The daily chart sends mixed signals, however, and still looks marginally more bullish than bearish.

The pair has formed a possible bullish pennant pattern which is likely to rise all the way up to the trendline drawn from the January 2016 highs at 18.500.

The 200-day MA stands in the way, however, at 17.36, and is likely to prove difficult to break.

Moving averages are not just long-term signifiers of fair value but also dynamic levels of support and resistance, in and of themselves. This explains partly why the rally has stalled and is a consolidating (going sideways) just below the 200-day.

The pennant is expected to resolve itself in a breakout higher eventually, which is then expected to extend in a move the same length as the pole, extrapolated higher, from the break.

On GBP/ZAR this would seem to indicate a potential move up to 18.500-800 eventually.

We would seek confirmation for the continuation higher from a break above 17.45.