**GBP/USD Recovery Curbs Threat of Head and Shoulders Formation**
*Based on the analysis by Matt Weller, Senior Market Analyst at FOREX.com*
The GBP/USD currency pair has experienced a notable recovery in recent trading sessions, raising hopes for sterling bulls and reducing the imminent risk of a bearish head and shoulders reversal pattern. As the macro environment evolves, traders and investors are closely watching technical formations and fundamental triggers that could guide the future trajectory of the pound against the US dollar.
**Technical Landscape: The Threat of Head and Shoulders Diminishes**
At the heart of recent market analysis is the classic head and shoulders pattern observed in GBP/USD’s medium-term chart. Traditionally, this pattern is interpreted as a bearish reversal signal, particularly if the price drops decisively beneath the “neckline,” which links the two reaction lows found under the pattern’s “shoulders.”
– The left shoulder formed in early March following a rally and subsequent pullback.
– The head was established in mid-April with a higher peak.
– The right shoulder appeared to develop over recent weeks, echoing the behavior seen earlier in March.
Technical analysts emphasize that the credibility of this reversal pattern depends on a confirmed breakdown below the neckline, which runs roughly through the 1.2300 area. Until then, the risk of a bearish reversal remains merely a threat rather than an inevitability.
**Recent GBP/USD Rally: A Closer Examination**
GBP/USD has mounted an impressive rally over the past week, gaining nearly 2 percent from its early May lows. This bounce follows a period of weakness where persistent dollar strength, a “risk-off” tone in global markets, and ongoing macroeconomic concerns in the UK weighed on the pair.
The recovery observed in sterling appears to have been underpinned by a combination of factors, including:
– Waning US dollar momentum as market participants dial back expectations for further rate hikes by the Federal Reserve.
– Hints of stabilization in UK economic data after a dreary patch earlier in the spring.
– A reassessment by traders of oversold GBP conditions, leading to position squaring and short covering.
**Key Technical Levels to Watch**
With the head and shoulders pattern no longer on the verge of activation due to the ongoing rally, attention shifts to primary technical levels that could determine the pair’s next direction:
– **1.2300 (Neckline Support):** A clear break below this level would confirm the head and shoulders pattern, signaling potential for a deeper decline.
– **1.2545-1.2550 (Near-Term Resistance):** This zone marks the cluster of previous swing lows and would serve as initial resistance after the reversal from recent lows.
– **1.2590 (Recent Pivot):** If GBP/USD can consolidate and push above this area, it would clear the way for a possible move towards 1.2700.
– **1.2190-1.2200 (Previous Support):** Should the pair lose steam, this area could provide downside support before retesting the neckline.
**Macro Backdrop: Drivers for Sterling and the Greenback**
Beyond technical patterns, the GBP/USD pair’s medium-term outlook is finely balanced on the interplay between UK and US economic dynamics.
*UK Side:*
– The Bank of England is walking a tightrope as it looks to tame stubborn inflation without choking off economic recovery.
– Recent data releases have shown some resilience. UK employment numbers have held up better than feared, wage growth is robust, and consumer confidence appears to be stabilizing.
– However, the underlying risks include the lingering impact of higher borrowing costs on households and businesses, as well as continued uncertainty surrounding the UK’s long-term economic prospects post-Brexit.
*US Side:*
– The Federal Reserve has reached a pivotal stage in its monetary tightening campaign. While inflation has moderated from its highs, strong labor market data has kept policymakers on alert.
– Market participants have started to reduce bets on further rate increases
Read more on GBP/USD trading.