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Ain’t it always the case that an exchange rate rallies into your trip, then starts falling after you’ve spent the lion’s share of the money? GBP/USD did that to me. It was looking so good early in January when the rate was down the low 1.50s, but by I time I left for my trip to England last week the rate was looking at testing 1.60. What day did the market peak? The day I checked out of my longest hotel stay, of course (insert your favorite string of curse words here).

What’s even more annoying is that GBP/USD really looks like it’s set up for a tumble.

On the weekly chart below we can see the clear support along the line going back to the lows from September 2010 near 1.5300. That was broken during the last leg down, but the market quickly reversed back higher. It hasn’t been able to push those gains to even create a test of the November peak, however, so the pattern of lower highs and lows since the 2011 highs remains in place.

These lower highs are also building a head-and-shoulders type of pattern on the chart. If we consider the peak of the pattern to be about at 1.6735, that gives us over 1400 pips in downside projection using the head-to-neckline measurement. A simple target would thus be about 1.3900. This is quite aggressive given the likely support above 1.4000 based on the 2010 lows, but it does provide a fair bit of scope as to the type of damage that could be done should GBP/USD manage a sustained break of 1.5300.

So what’s the catalyst for that kind of action? The BoE has already announced GBP50bln of additional QE. That has largely already been priced in and the market isn’t looking for any big additions at this point. The biggest risk factor at this point is a crank back up of the risk-off market psychology that would drive the dollar higher. If we see the S&P 500 fail to overcome the 2011 highs as part of the current rally, that becomes a very real risk.

This couldn’t have happened a bit sooner?

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