More Pain for the Pound

02/10/2011 1:00 am EST

Focus: FOREX

As highlighted in yesterday’s article, the British pound appears positioned to undergo a technical downward correction to its latest upswing. The GBP/CAD appears to also support such a perspective.

The GBP/CAD has been trading within a long-term downtrend since late-January 2007, when the pair peaked at 2.3566. Since that time, the pound has given significant ground to the loonie, currently trading at 1.5965, a 32.2% loss in value over the past four years.

chart
Click to Enlarge

What I would like to emphasize here is not that this downtrend is coming to an end, but rather that traders should not expect it to come to an end anytime soon.

As per our technical analysis, this pair has recently touched the long-term trend line and begun its downward cycle.

The Relative Strength Index (RSI) shows the price gradually cascading downward, supporting the cyclical downturn. The (slow) Stochastic also shows what could be a bearish cross above the 80 line; a solid indication of impending bearishness.

As you can see below, the pair recently found a support line, which has created a convergence triangle. The convergence point of this relatively new formation looks to be just barely above the 1.5500 price line, which represents our impending target.

Such convergence formations have historically meant that the pair will continue its long-term trend once reached. As such, traders may want to anticipate a stronger downward movement once the 1.5500 price line is breached in the coming weeks.

By Greg Holden of ForexYard.com

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