The GBPUSD pair, also known as “cable” was one of the currency pairs that bounced the most in the last few weeks. As the health crisis peaked, GBPUSD dropped to as low as 1.14, only to bounce to 1.26 in less than a month. With US joblessness continuing to grow, many wonder if this could be set for further moves.
This could well be possible. However, at this stage, it has shown some reversal patterns – a double top. Such a pattern reflects the price’s inability to break a certain area, or “resistance”. This comes as the currency market volatility continues to provide price uncertainty, and traders are unsure as to where the rate should be. This area in this instance is the 1.26 level for cable, where markets have reversed from after hitting it twice.
Implications of a Double Top
A double top resembles the letter M. Moreover, it has a measured move. Technical traders draw a horizontal line that defines the two tops and use another line to measure the distance. Double tops are powerful reversal patterns, but they do not work 100% of the time. The risk is that the price only builds energy, finding it hard to break horizontal resistance on its first attempt.
In other words, the possibility of the market forming an ascending triangle should not be ruled out. In fact, the early stages of an ascending triangle’s formation almost always show a double top.
What the GBPUSD chart shows is that from mid-March until now, the price sits in a range. Uncertainty dominates, and traders are in a wait and see mode.
Cable is also affected by news related to Brexit, which represents another driver of flows when compared with the current coronavirus pandemic. Later in the year, there is the US Presidential election. Investors position themselves on the USD markets well before the election.
The currency market, in general, shifts based on technical and fundamental factors. Technical patterns, like a double top, offer a clue about where the market might go. But the fundamental factors give the “push” that prices need to truly move.
Looking forward, the path of least resistance is for cable to follow the US and UK related fundamentals, and swinging based on which economy is most impacted at the time.