GBPUSD has formed a head and shoulders pattern on its 4-hour time frame, suggesting a potential reversal from the previous uptrend. 

Price is testing the neckline around the 1.4050-1.4100 levels and a break could be enough to confirm that a downtrend is underway.

The chart pattern is approximately 400 pips tall so the resulting breakdown could be of the same size, taking GBPUSD down to the 1.3700 area. However, if the neckline support holds, another bounce to the 1.4500 handle could be seen.

The 100 SMA is still above the 200 SMA for now so the path of least resistance is to the upside. If a downward crossover takes place, sellers could take the upper hand. Stochastic is on the move up so buyers are taking control.

Event risks for this setup include the release of UK CPI tomorrow and the BOE statement later on in the week. Data has taken a turn for the worse in the UK so there’s a strong chance that UK central bank officials might sound less upbeat.

As for the US, retail sales and PPI numbers are lined up for Wednesday while Thursday has the CPI due. Headline retail sales could grow by 0.1% while core retail sales are expected to rise by 0.4%. Meanwhile, the headline and core CPI readings could show 0.2% gains.

Risk appetite could still have a significant effect on this dollar pair’s price action, as traders have been pricing in Brexit concerns once more. In addition, easing biases among several central banks have increased demand for the safe-haven dollar.

By Kate Curtis from Trader’s Way