GBP/USD’s bullish momentum expected to lose steam

AFTER an uptrend throughout November and December 2023, the GBP/USD has been range-bound in January 2024 so far as the bullish momentum loses steam. At the time of writing on Jan 26, the GBP/USD traded slightly above 1.27 and we hold a bearish bias on the pair as suggested by several technical setups.

The first indication that suggests further downside for the GBP/USD is a breakdown from a rising channel formation on Jan 16. Following the breakdown from the rising channel’s support band, the pair rebounded but failed to close above the dynamic zone. This established the former dynamic support zone as a resistance zone. A successful retest serves as validation for a break in the bullish structure, indicating that the pair may be headed for a bearish trend reversal.

Moreover, since the second half of December 2023, a bearish descending triangle pattern has also been taking shape, adding confluence to the bearish biased outlook. A descending triangle pattern can be identified when prices make a series of lower highs, while finding support above a horizontal support zone. The lower highs show waning bullish momentum and suggest a high probability of the GBP/USD moving lower in the event of a breakdown below the horizontal support zone at around 1.2615. Upon the breakdown, a downside technical target can be set as low as 1.2400 (S2). This breakdown target is normally derived from the vertical distance at the opening of the formation.

In terms of technical indicators, the Relative Strength Index (RSI) is also displaying signs of a further downward move in the pair. The RSI is a momentum oscillator that indicates bullish momentum when the reading is above 50, and bearish momentum when the reading is below 50. Although the RSI at the time of writing is above the neutrality zone of 50, it has shown a bearish divergence from price movements since November 2023. A bearish divergence occurs when prices make a series of higher highs, while the RSI creates lower lows, signalling that the bullish momentum is waning.

Looking ahead, we expect the GBP/USD to retrace towards 1.2610 (S1), which represents the lower support of the descending triangle. If the S1 zone is broken, we set a breakdown target to the downside at around 1.2400 (S2) and 1.2313 (S3) in extension. Alternatively, if the pair changes course to the upside, the downtrend will be invalidated if the price posts a daily close above the 1.2828 zone.

The writer is strategist at Phillip Nova