GBP/USD: Looks ready for a 338 pips rally

Alejandro Zambrano ATFX

Since March 1, the GBP/USD has been trading sideways. At one point, it looked like the price was heading towards 1.33. Yet, the price has stabilised, and from a technical point of view, the price might be in the process of carving out an inverse head and shoulders pattern, with a target of 1.4353. The fundamental outlook is also favourable.

BoE QE to End and Fed on Hold

The British economy was one of the hardest hit by the pandemic, given its services orientation. Its weakness could now be its strength as the UK economy is set to reopen faster than most other countries, given that at least 50% of the total UK population has received at least one vaccine shot. The US is lagging at 42%. The Bank of England’s quantitative easing program is also due to end by the end of the year. I don’t think the BoE will turn hawkish anytime soon, but just letting QE expire could be bullish enough.

Also, as expected the Federal Reserve is reluctant to even consider to tapering their QE program, despite strong growth and high inflation, the latter is said to be short-term in nature. Investors will therefore be careful to bet on a stronger dollar in the very short-term, and this might help GBP/USD to trade above the neckline of the bullish head and shoulders pattern.

Technical outlook

The March 5 low of 1.3778 might be the left shoulder, whilst the March 25 and April 9 low at 1.3670 might be considered to be the “head” of an inverse head and shoulders pattern. The right shoulder is still in the process of being chiselled out. The neckline at 1.4006 is, however, already in place. GBP/USD was rejected at 1.4006 on five days, and April 20 was the last time the price turned lower from this crucial level.

If the GBP to USD rate indeed manages to clinch above 1.4006, we might see the price reach 1.4353 weeks later. The 1.4353 target is derived by taking the difference of the neckline level at 1.4006 and the head low at 1.3670 and adding the difference to the breakout point.

GBP/USD Six-hour Chart

Author

Alejandro Zambrano

ATFX

Alejandro Zambrano is ATFX’s Global Chief Market Strategist. He combines extensive professional experience and a pragmatic attitude to trading, building clients’ understanding of the markets and the rationale behind investing.

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