Though GBP/USD has recovered some of last week’s losses, the pair continues to trade from the back of its foot. We have been anticipating a turn lower at a larger time frame for the past couple weeks because of the Elliott Wave model we are following. We could be on the forefront of larger losses for GBP/USD.
The sentiment picture is more closely aligning with the technical turn as long traders have increased 10% over the past week while short traders have decreased 4% from last week. This has caused the sentiment reading to increase from -1.50 to -1.37 to now. A positive shift towards sentiment is a subtle bearish signal as we use sentiment as a contrarian type of indicate. View the live sentiment reading and learn more about how to trade with sentiment on our IG Client Sentiment page.
We cited previously in “GBP/USD Terminal Wave Matures” that some wave relationships near 1.3060 suggested a reaction lower might occur. Based on the longer term Elliott Wave triangle pattern, this could be the start of a new trend lower that possibly retests 1.19.
Zooming out on the chart to inspect the longer term pattern, we see GBP/USD correcting higher from the October 2016 low in a three wave move labeled A-B-C. The ‘B’ wave appears to have carved a triangle that ended on April 9. We can count a ‘C’ wave higher that appears to be finished.
Three wave moves like this are typical of corrections and suggest a higher probability potential for a complete retracement. In this case, a retracement back towards 1.19. The next important test for GBP/USD will be the 200 day simple moving average, which also appears near a former resistance trend line. This level resides near 1.2596.
If prices move higher above 1.3060, additional topside levels that may create a reaction include 1.3200-1.3235 and then 1.34.
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—Written by Jeremy Wagner, CEWA-M
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