GBPUSD has completed a classic head and shoulders reversal pattern on its 4-hour time frame, with the recent break below the neckline support around 1.3450 confirming that a longer-term trend reversal could be underway.
The pair has since declined to the 1.3340 area, suggesting that bearish momentum is building after the pattern completion. The head and shoulders formation shows a clear peak around 1.3750 (the head) flanked by two lower highs near 1.3650 (the shoulders), indicating that buying interest has been waning at higher levels.
The measured move target from this reversal pattern points to potential downside toward 1.3150-1.3200, representing roughly the same distance as the head’s height projected from the broken neckline.
From a moving average perspective, both the 100 SMA and 200 SMA are beginning to flatten out and converge, suggesting that the longer-term uptrend that supported GBPUSD earlier in the year is losing steam. Price is now trading below both dynamic indicators, which could act as resistance on any corrective bounces.
The stochastic oscillator has moved into oversold territory below 20, reflecting strong selling pressure in the near term. However, the indicator has been trending lower for several sessions, suggesting that bears remain in control. A potential bounce from current oversold levels could provide a temporary reprieve, but any recovery would likely face resistance around the broken neckline.
RSI readings have also deteriorated significantly, dropping toward the 30 level and confirming the bearish momentum shift. The oscillator has plenty of room to decline further before reaching extremely oversold conditions, indicating that the selling pressure could persist.
GBPUSD could face additional headwinds from diverging monetary policy expectations between the Bank of England and Federal Reserve. Any signs of dovishness from the BoE could accelerate the decline toward the pattern’s measured move target near 1.3150 while hawkishness from the upcoming FOMC decision could drive the dollar higher.