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.

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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.

Has recent GBP market movements have you confused? Check out DailyFX’s second quarter forecast.

---Written by Jeremy Wagner, CEWA-M

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