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Watch This Pattern in the British Pound

British pound futures are in a long-term downtrend, with the June contract hitting a low of 1.3844 on February 29. The low created the head of an inverse head and shoulders pattern.  The pattern has not completed yet, but when it does it will likely signal the price direction over the next one to two months.

The pattern is created by the January 21 swing low (left shoulder), the February 29 low (head) and a series of swing lows that have formed a channel throughout March and April (right shoulder).

If the price rallies above the neckline of the pattern at 1.4435, the pattern will be broken (complete) and a further rally could ensue. In that case, the potential target is 1.5110. The target is based on the height of the pattern (low to current top of right shoulder). The rally above 1.4435 also breaks the month long descending channel.

Figure 1. June British Pound Futures

On the other hand, a drop below 1.3985 breaks the channel to the downside, which could indicate further weakness. While the head and shoulders pattern is often viewed as a reversal pattern, it can also be a continuation pattern. If the price starts dropping much below 1.3985, the long-term downward trend could very well continue. Downside target would then be 1.3310.

The British pound is heavily influenced by the possibility Britain will leave the European Union. A referendum will be held in June 23. News events related to the "Brexit" could cause price shocks, and the referendum results will have a huge impact on the price. Technicals are important, but they are not the only factor right now.

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