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As GBP/USD hits bottom of wedge, reversion is likely

THE pound peaked in 2018, with prices reaching a high, well above entire 2017. Looking back to January 2018, the GBP/USD was standing at the 1.4354 level, which was shortly followed by a 4.4 per cent dip, and then proceeded to retest the high again three months later.

Since April 2018, however, prices have been on a downward trend, reaching a low of 1.1988 where it currently stands, coinciding with two strong support levels. Moving forward, we postulate that the pair will undergo a mean reversion to the high due to a few key factors.

The first key factor, which establishes 1.1988 as a bottom, showed prices have coincided with the bottom wedge line for the third time, validating the strength of the support along the horizontal plane. Coupled with that is the intersection with other key support formed on the vertical plane where prices had previously reversed from.

Wedges are usually identified as a reversal pattern which forms when the price of an asset moves within a narrowing range, either angled up (Rising) or down (Falling). The pattern is completed when price breaks out and traverses in a direction opposite of the wedge angle; upwards in this scenario.

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The second key factor lies with the weekly stochastics oscillator which, in this case, works extremely well in spotting a reversion to the high when the oscillator falls below 20.

Stochastics oscillator is a directional indicator. A reading above 80 signifies an overbought condition while a reading below 20 represents an oversold condition.

In the previous encounters where prices reached the bottom of the wedge, they coincided with the oversold condition followed by a reversion of the prices. We observe the occurrence of the same conditions as prices approach the lower bound once again.

Based on the formation of the wedge, prices are likely to revert to the upper bound of the pattern, reaching the 1.2650 level before encountering the first level of resistance. Thereafter, should prices break above the wedge, the next region where sellers will reside is likely to be around the 1.3298 level (Previous Swing High).

  • The writer is a strategist at Phillip Futures

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