The British pound has literally been pounded in recent months after the Bank of England turned dovish following the release of some weaker-than-expected UK data and the growing disinflationary pressures stemming from the slumping oil prices. Likewise, the short-term charts of the GBP look bearish across the board and many market participants are growing ever more bearish on the currency. But amidst all this doom and gloom, could the pound stage an unexpected rally?
Well, the monthly chart of the GBP/USD suggests either a rally or a BIG drop is on the way. As can be seen, a bullish trend line that stretches back to the 1980s (!) is being tested at the moment. This trend line is derived by connecting the low point of 1985 with that of 2009, and extending it to the future. The projection from those points suggests the trend line comes into play around the 1.43-1.44 region. If that’s not interesting enough, the bullish trend of a shorter-term bearish channel also comes in around here. The convergences of these trend lines could be enough to provide strong support to the GBP/USD.
However, if the long-term bullish trend line breaks down decisively – ideally (for the lack of a better word) on a monthly closing basis – then a drop to the key 1.40-42 support region would become highly likely. This area marks the neckline of a long-term Head and Shoulders reversal pattern. Thus should we eventually break below there then the Cable could start its descend towards the 2009 low at around 1.35.
In short, the GBP/USD is testing a major support area around 1.43/44. What happens here could determine the direction of price action for potentially the next several months.