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Strong bearish signals on daily GBP/USD chart

The UK pound has gained strongly against the US dollar over the last few weeks, climbing from a low of 1.5406 earlier in the month, and reaching an intra day high of 1.6059 earlier this week, and the question now of course is whether this bullish momentum is likely to continue, or are we likely to see a pull back from this level in the short term? To try to answer the question, let’s look first at the technical picture, and in the daily chart we have seen two bearish candles in the last two days, first on Tuesday with a deep hammer candle, followed on Wednesday with an even stronger signal of a small hammer candle again, but this time as an inside day, a double signal if you like of weakness, and a potential pull back as a result.

In addition, today’s price action has once again failed to breach the highs of the last two days, adding further weight to this analysis, and having seen 9 straight days of gains, the rally now looks to be running out of steam at the psychological level of 1.6000. Immediately ahead is a deep area of price congestion, and this has added a further layer of negative sentiment to the daily chart.

From a fundamental perspective, the recent strong move higher for the British pound was largely fuelled on an expetation that interest rates would rise sooner rather than later, following the increase in headline inflation which is now ell above 3% and looking set to rise further. Indeed the same sentiment was behind the recent surge in the euro, with Trichet’s comments regarding a rise in rates last week sending the euro surging as as result against the dollar. Since then, in the UK, the realisation that the prospect of a rate rise seems less likely has seen the pound pull back, and with the the dollar index now looking to recover following yesterday’s doji candle, this looks an excellent set up for a firm move lower in the next few days, and as such is my forex top tip for today.