GBP/USD – Divergences remain

Time for a correction?

The pound has continued to push lower in recent days but continues to lack momentum, which could point to further weakness in the sell-off.

The most recent low came on reduced momentum again which suggests a corrective move may not be far away. It’s worth noting that divergences between price and oscillators aren’t reversal indicators on their own, rather a warning sign that a reversal may be coming as the move is losing pace.

So while the pair is still trending lower, the fact that it’s not generating fresh momentum continues to point to weakness in the sell-off.

What it does do is slightly alter the key levels above. The first test for the pair is now the top of the descending channel around 1.3250, a break of which could be an early signal that a correction is underway.

The next test falls around 1.33, a historic level of support and resistance that now coincides with the 55/89-period SMA on the 4-hour chart. Above here, 1.34 looks interesting while 1.35 will be key, falling around the 50 fib level on the daily chart, perhaps the 55/89-day SMA, and maybe the 200/233-period SMA on the 4-hour chart.

Of course, it’s worth noting that until the price breaks higher, we could see further lows. The key is whether it generates fresh momentum or not. If so, further declines could follow and gather more momentum. If not, the sell-off continues to look weak and prone to quick rebounds.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.