GBPUSD may be done with its long-term selloff, as the pair formed a reversal pattern on its daily time frame. An inverse head and shoulders can be seen and price is already testing the neckline around the 1.5500 major psychological resistance.
A break above this level could confirm that a reversal is underway, as this would also mark a climb past the longer-term 200 simple moving average on the daily chart. For now though, the short-term 100 SMA is treading below the long-term SMA, indicating that the downtrend is still intact.
Stochastic is pointing up, which means that pound bulls are in control of price action and are willing to push for more gains. If the reversal pattern is confirmed, the pair could be in for roughly 900 pips in gains, as this is the same height as the chart pattern. On the other hand, if the resistance at the neckline holds, GBPUSD could move back to the area of interest at 1.5000 or to the previous lows around 1.4600.
The main event risk for this reversal setup is the BOE Inflation Report tomorrow, during which policymakers could clarify if there are any changes in their economic assessment and outlook. Governor Carney is set to explain why the annual CPI is still below target and how long it might take before inflation regains ground. Optimistic remarks could allow the pound to extend its gains while downbeat comments could spark a selloff.
Also lined up tomorrow is the UK claimant count change, which might show a 20.1K drop in joblessness and an improvement in the unemployment rate from 5.6% to 5.5%. Stronger than expected data could also boost the pound across the charts, as this might indicate that the UK economy is back to its impressive streak of strong hiring gains. On the other hand, bleak jobs data could lead to a pound selloff, as it might undermine any upbeat remarks from the BOE.
By Kate Curtis from Trader’s Way