Image © Goroden Kkoff, Adobe Stock

- Bullish pattern completes, heralds turnaround

- Move to 1.8150 GBP/AUD, or higher, now possible

- Risk aversion the main Fundamental catalyst weighing on AUD

The Pound-to-Australian Dollar exchange rate has completed a bullish reversal pattern which indicates the likelihood of more upside on the horizon, says Richard Perry, market analyst at Hantec Markets.

The pattern is called an ‘inverse head-and-shoulders’ (H&S) and is composed of three consecutive lows, the middle trough of which (the ‘head’) is the lowest.

It is a bullish reversal pattern which is triggered when the ‘neckline’ at the highs is breached, as has been the case with GBP/AUD, which has now successfully pierced the neckline at 1.7815.

The expected upside is equivalent to the height of the H&S from its lowest point to the neckline, extrapolated above and suggests substantial gains.

“That suggests we are going to continue higher within this Fibonacci retracement of the sell-off. 1.7968 comes in at the next Fib level of 50%, then 61.8% is 1.8150,” says Perry of the upside potential. “It certainly looks like the November highs could come under test now too at 1.8165-70.”

Fibonacci retracements are key levels, the main ones of which are at 50.0% (the midpoint) and 61.8% of the prior move (in this case the October-December move) where prices often pause or rotate.

Another feature of the charts is that strong upwards momentum is supporting the rally and favours an extension.

“Look at the momentum indicators: RSI is almost at 60, that is two and a half month highs! MACD accelerating, stochastics accelerating,” says Perry.

The main fundamental driver for the rally is the Australian Dollar, which because it is sensitive to market sentiment, has weakened as a result of increasing risk aversion due to the continued sell-off in the US and other global stocks.

The Pound, meanwhile, has stayed relatively stable as traders await the next big event, the meaningful vote in January. The combination of neutral Pound paired with weak Aussie has led to a continuation of the uptrend.

Two major obstacles do still stand in the way of further gains, however, even though Perry does not mention them.

The first is the 50-day moving average (MA) at 1.7833 and the second is the 200-day MA at 1.7922. These could present obstacles to the uptrend and lead to a possible pause, pivot or even reversal lower.

Major MAs are often the site of key reversals on charts as they attract short-term technical traders looking to fade the dominant trend. This is what creates the counter-trend forces around the MA. This effect means we would ideally like to see these two MA’s surpassed before forecasting more upside.

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