Following the Monday rally driven by the positive news regarding Brexit, the pound is trading lower again, and yesterday was again rejected sharply from higher levels. Certainly, the press conference between UK PM Rishi Sunak and EU's President Ursula Von Der Leyen Monday was received well by the markets. They announced they've reached a deal about Northern Ireland. This is a positive for the pound, however, it's unlikely to have a big impact considering the (small) size of Northern Ireland and the potential economic impact it could have.

So, with the reaction now having settled, the global and risk sentiment factors are back as the main drivers for GBP. Bank of England rate hike pricing is also running a bit high, with markets expecting 3-4 more 25bp hikes. However, just yesterday, BOE Governor Andrew Bailey poured cold water on those expectations, saying he sees "no pressing need for more rate rises". GBPUSD fell by 60 pips within an hour and around 100 pips after two hours of the Andrew Bailey news release.

Any further news that the BOE is likely to deliver fewer than the 3-4 hikes expected should drive GBP materially lower. For GBPUSD, the chart is at a key juncture (more below), which coincides with the crossroads at which GBP finds itself in the fundamental sphere.

A bearish catalyst related to BOE rate hikes or some other factor (e.g., worsening risk sentiment) will result in a breakout of the key support zone. At the same time, US fundamentals started to improve again, causing the USD to rebound by the most in five months. A stronger dollar should provide an additional push for lower GBPUSD.

Below, we discuss the details and the trade idea based on this development.

The daily GBPUSD chart looks increasingly heavy, accurately reflecting the recent fundamental developments. A clear couple top pattern (also known as M top) has formed here. GBPUSD is now testing the support zone of the pattern's breakout line. It is located around the 1.1950 - 1.1900 zone. A bearish break to the downside will trigger the double top pattern and signal further losses for the pair.

The double top pattern is traded simply. Once the neckline breaks, there is a clear target zone. In this case of GBPUSD, we can measure the distance between the support line (around 1.19) and the most recent top around 1.2450. It measures a total of 550 pips. The projected target is roughly 550 pips to the downside below the support line. That means we can target GBPUSD at 1.15 at least, if this double top pattern is triggered.

Trade Plan

GBPUSD is now nervously testing the support line. The actual low of the previous downside attempt is 1.1930. GBPUSD is currently trading exactly at this level. 

A breakdown may happen sooner than expected. A daily close below this 1.1930 level should be a clear signal that a bearish breakout is confirmed. This can be used as the entry signal for a short trade.

Entry

• Look for a bearish daily close to confirm a breakout of the support line and trigger the double top pattern;
• Entry on such a confirmed bearish signal; likely to be somewhere around or below the 1.19 level

Stop loss:

• Place the stop at least above the 1.20 zone;
• The stop may also need to be placed higher than that. The previous swing high is around 1.21, so this could be an appropriate level for a stop as well

Targets:

• Target toward the 1.14 - 1.15 area
• 1.1650 is an important support zone; Taking some profits here would be a wise step