Sterling has been the strongest performing major currency over the last month but after a strong post-election rally, it may begin to be losing a little steam against the dollar.
Cable is about to face a huge test of its longer term strength as it approaches a cluster of previous support and resistance levels and the 233-day simple moving average.
As the pair approaches this level, both the stochastic and MACD histogram on the daily chart suggest the rally may be losing some momentum. I wouldn’t say the bearish divergence is complete at this stage but it certainly looks like that will be the case. A bearish divergence also wouldn’t guarantee that a reversal will occur now, just that it may occur soon as momentum is being lost.
As of yet, I haven’t seen an actual reversal signal and that may not happen until it reaches the 1.5780 – 1.5880 range. If I see a reversal pattern around this area, such as a double top, head and shoulders, or even a single or double candlestick formation such as shooting star or bearish engulfing pattern, I would expect to see a bounce off this level.
This could suggest that the longer term dollar rally is ready to resume, following a month-long correction. An early sign of this could come from April 29 highs being broken, or better still 5 May lows. Below here a break of last month’s near-five year lows would provide further confirmation.
A break above the 1.5780-1.5880 region would be very bullish in my view, with the next big resistance level coming around 1.62, the 61.8% retracement of the previous move and a previous level of support and resistance.
Further insight into client positions and currency strength, among many other things, can be found on the FX labs section of the OANDA website.