Head and shoulders, bearish pennant hints to more downside

3 mins read
GBP/USD: Head and shoulders, bearish pennant hints to more downside
  • The GBP/USD has been under pressure in the past two days.
  • Subsequently, it has formed a bearish pennant and head and shoulders patterns.
  • This is further evidence that the pair will see more declines.

The GBP/USD pair turned lower today after the relatively weaker construction PMI data from the UK and the fears of the rising Covid cases. It is trading at 1.3575, which is slightly below this month’s high of 1.3700.

GBP/USD rally has waned

UK construction PMI misses estimates

The construction industry is an important sector in the UK, employing thousands of people. In recent months, the sector has boomed due to the strong mortgage market. However, the situation could be cooling if the latest construction PMI is to go by. 

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According to Markit, the UK construction PMI data declined from 54.7 in November to 54.6 in December. The index has been above the important 50.0 thresholds for the past seven consecutive months.

This growth is mostly due to the residential construction sector, whose index rose to 61.9. Commercial construction increased to 51.2 while civil engineering declined to 48.0. Construction orders increased leading to higher prices, employment, and robust confidence about the future. The report said:

“Long-term prospects came to fruition and halted projects started again as clients became more optimistic after the covid hiatus. To meet this demand head-on, builders opted for job creation for the first time in 21 months to increase previously pared-back capacity.” 

These numbers came a day after Markit released weak services PMI data. In December, the PMI remained below the threshold of 50 for the second straight month. 

Looking ahead, the next major information that will move the GBP/USD pair will be tomorrow’s nonfarm payroll numbers from the United States. Economists polled by Reuters expect the data to show that the economy created just 100,000 jobs in December.

Also, they see the unemployment rate rising from 6.7% to 6.8%. Just yesterday, data by ADP revealed that the economy lost 123,000 jobs. Weaker numbers will lead to calls for more stimulus by the incoming administration.

GBP/USD technical outlook

GBP/USD technical chart

The four-hour chart shows that the GBP/USD pair has formed a bearish head and shoulders pattern. Also, the pair has formed a bearish pennant pattern that is shown in blue. The price has also moved below the 25-day and 15-day exponential moving averages. Therefore, in the near term, I suspect that it will continue falling as bears target the neckline of the H&S pattern at 1.3500.