I last covered the GBP/USD exchange rate on December 19 last year and my forecast for the pair was highly accurate. At the time, I wrote that the pair would retreat to about 1.2000 and then resume the bullish trend. Instead, the pair dropped to 1.1843 after the final decisions by the Bank of England (BOE) and the Fed.
2023 has started well for the sterling as it has jumped by over 4% from its December lows. This recovery was primarily due to the ongoing US dollar index (DXY) sell-off and the risk-on sentiment spreading in the market. Expectations are that the Fed and other central banks will slam their brakes on interest rate hikes on the face of retreating inflation and high probability of a recession.
There are some important economic data from the US and UK this week. On Wednesday, S&P Global will publish flash manufacturing and services PMIs for December. While these are important numbers, their impact on the pair tends to be muted. The US statistics office will then release the first estimate of GDP data on Thursday followed by PCE numbers on Friday. So, what next for the pound to dollar pair?
The strong sterling comeback has hit a major resistance at the 1.2452 level, which coincides with the highest point on December 14. This price action resembles a double-top pattern, which is often a bearish sign. Its neckline is at 1.1841 (January 6 low). Another bearish pattern is the rising wedge, which I have indicated well in yellow. With the pattern nearing its level of confluence, it is sending some warning signs that the pair could have a bearish breakout soon.
Meanwhile, the double-top formation also has a close resemblance to a cup and handle pattern that I have indicated in pink. C&H is one of the best-performing continuation patterns in the industry. But for it to happen, it needs either a pullback or a consolidation for its handle section.
Therefore, while trend indicators like EMAs point to more gains, I take the contrary view that the GBP/USD price will retreat in the coming days. If my view is correct, the price target will be 1.2210, the highest point on January 9. A breakdown below that level will see it drop to 1.2092.
On the flip side, a volume-supported move above the year-to-date high of 1.2452 will invalidate the double-top and cup and handle (C&H) pattern. It will signal that bulls have prevailed, which will push the pair to the next sensible psychological level at 1.2500. Subscribe to our trading education page to learn more about technical analysis.