GBP/USD popped to 1.3048 yesterday just shy of the 1.3060 zone cited previously in “How Much Higher Can GBP/USD Continue.” Though we cannot say for sure if the reversal begins at this level, yesterday’s price action puts Cable at risk of a large reversal.
The model we are following is Elliott Wave theory. You see, it appears a triangle terminated in April 2017. According to Elliott Wave theory, triangle patterns precede a terminal wave in the sequence. That suggests the rally that began on April 9 is a terminal wave and once this wave completes, a larger correction may settle in to possibly retest 1.19.
IG Client Sentiment is shifting positive which also hints a turn lower is lurking nearby. Sentiment has increased from -1.78 to -1.50 in the past 11 days.
For the time being, if this 1.3060 zone holds to the upside, then we can use a downside break of yesterday’s low at 1.2888 to trigger short positions. A break of 1.2888 coupled with increasing sentiment would add confirmation to a topping pattern.
If strength persists above the 1.3060 zone, then a stronger level of multiple wave relationships rest near 1.3200-1.3235. This doesn’t mean Cable has to turn lower at that point, but the multiple wave relationships suggest an elevated potential for a reaction lower.
This corrective pattern could work its way higher towards 1.34, though we are uncertain of the odds that it will reach that high.
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---Written by Jeremy Wagner, CEWA-M
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