GBP/USD Retreats From Strong Resistance Zone

GBP/USD (daily chart as of April 7, 2014) once again respected the resistance of 1.6670 on April 1, with a black candlestick that engulfed the entire body of its previous white candlestick. The pair has been trading below 1.6670 for about a month since March 10.

If price is unable to clear the resistance zone of 1.6670-1.6725, a potential head and shoulders pattern (gray shadows on chart) may be in the making, with the uptrend support line (line 2) as the potential neckline of the pattern.

As mentioned in our March 28 analysis, current price is facing multiple resistance levels above, including the downtrend resistance line connecting the highs since February 16 (line 1), as well as the mentioned resistance zone. Note that line 1 is approaching the resistance zone now.

A neckline breach would confirm the pattern, but in this case of GBP/USD, we also require a breach of the daily EMA 100 to confirm. Take a closer look at how price has been respecting the daily EMA 100 since late 2013. The most recent two tests are highlighted on the daily chart (two arrows).

If the pattern is confirmed, a short position will be triggered with the first target at 1.5450, followed by 1.6250, and potentially the 1.6020 level (head and shoulders pattern projection). Only a break to the upside out of the resistance zone would negate this bearish outlook.

The pound has been the best performer among its peers in the past year with the UK’s improving economy and falling unemployment. However, it appears that the pair’s recent recovery has been losing upside momentum. Bank of England will meet on April 10 with regard to its interest rates decision.

Support levels below:
1st support: line 2
2nd support: daily EMA 100
3rd support: 1.6250 or daily EMA 200

Resistance levels above:
1st resistance: 1.6650/70 (March 19 high / January 24 high)
2nd resistance: 1.6725 (February 21 and 25 high) or line 1
3rd resistance: 1.6785/6820 (March 7 high / February 16 high)