**GBP/USD Recovery Curbs Threat of Head and Shoulders Formation**
*Based on the article by Fawad Razaqzada, Senior Market Analyst, FOREX.com*
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## Introduction
The GBP/USD currency pair, also known as “cable,” has been a focal point for forex traders amid heightened volatility in global currency markets. After showing some vulnerability in recent trading sessions, the pair has managed a recovery that currently undermines the threat of a major head and shoulders reversal pattern. This pattern, widely monitored by technical analysts, could signal a bearish reversal if confirmed, potentially pushing the pair into a much deeper correction. As things stand, the bulls have managed to stave off an immediate breakdown, but the technical and fundamental landscape remains fraught with risks and opportunities that traders should monitor closely.
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## Recent Price Action: GBP/USD’s Recovery
In early June 2024, GBP/USD experienced notable selling pressure, pushing it down from its mid-May highs. The pair briefly fell under the key 1.2700 handle, sparking concerns that a head and shoulders pattern was developing. This technical formation is defined by three peaks: a higher middle peak (head) and two lower peaks on either side (shoulders). The neckline, serving as the support, was perceived to be in the 1.2590-1.2600 region.
### Key Developments Over the Past Week
– **Price Drop**: GBP/USD fell from the 1.2800s to below 1.2700, raising caution of a bearish reversal.
– **Support Holds**: The neckline near 1.2590 to 1.2600 has acted as a strong support, preventing a deeper selloff.
– **Bullish Rebound**: The pair has bounced back above 1.2700, indicating renewed bullish sentiment and lessening the immediate threat of a head and shoulders breakdown.
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## Technical Analysis: Reading the Chart
### The Head and Shoulders Pattern
The head and shoulders pattern is one of the most reliable reversal patterns. In GBP/USD, the prospective pattern looked like this:
– **Left Shoulder**: Formed in early May near 1.2635.
– **Head**: Mid-May spike to 1.2800s.
– **Right Shoulder**: Late May peak failing to surpass the head, topping near 1.2760.
– **Neckline**: The key support region of 1.2590–1.2600.
If a breakdown had occurred below the neckline, it would likely have signaled a more sustained move lower, possibly targeting levels further below 1.2500.
### Why the Breakdown Didn’t Happen
– **Support Held Firm**: Every dip towards the neckline was met with solid buying interest, leading to short coverings.
– **Bullish Daily Candles**: Consecutive positive closures above 1.2700 suggest that bullish momentum is prevailing.
– **Momentum Indicators**: RSI readings have stabilized, and MACD signals are neutral to slightly positive, further reducing fears of immediate bearish breakdown.
### What to Watch Next
– **Immediate Resistance**: The 1.2760-1.2800 area is now an important resistance zone. A close above here would reinforce the bullish case.
– **Support Levels**: Should the reversal return, 1.2650 and the neckline near 1.2590 remain crucial areas to the downside.
– **Pattern Still in Play**: While the head and shoulders threat has receded, a setback with a daily close below the neckline would reawaken the bearish scenario.
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## Fundamental Factors at Play
### UK Economic Backdrop
The UK economy plays a significant role in driving GBP sentiment. Several key developments have influenced the currency:
– **Inflation Trends**: UK inflation has seen signs of easing, but remains above the Bank of England’s (BoE) target. This has
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