GBP/USD – Inverse head and shoulders forming?

Can it break higher?

It can’t be often that a Prime Minister is hours away from potentially being removed by their own party and yet the currency is rallying? Of course, the UK political scene has been far from normal for a number of years now.

You could read one of a number of things into today’s moves. The most important is that nothing has moved particularly far so we shouldn’t get carried away with the narrative. The other is that it typically takes something dramatic for politics to impact FX markets heavily and I’m not sure a change of leadership in the Conservative party – and of course, as PM – quite falls into that category.

It could be argued that the pound moving a little higher was excitement at the prospect of Boris being removed from number 10 but I don’t buy that. The more realistic argument – and I say this with a pinch of salt due to what I said previously – is that should he survive, as he is widely expected to, it arguably creates more political stability than there’s been for some time. Although that may depend on the scale of the victory but another challenge can’t come for at least 12 months.

Ignoring all of the theatre around parliament, the GBPUSD pair was already looking interesting ahead of the no-confidence announcement. An inverse head and shoulders has been forming over the last six weeks and we may be nearing a point where the neckline will be tested. A break of this could be a very bullish development, given the size of the formation and the possible projections it offers.

The neckline appears to fall around 1.27 but as you can see on the 4-hour chart, the first big challenge is coming around 1.26 where the upper end of the 55/89-period SMA band crosses the upper end of the 200/233-period SMA band. A break above here could quickly see that 1.27 resistance come under pressure and with momentum. That could make for an interesting few weeks in the cable pair.

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