GBPUSD is starting the week lower following Friday’s rejection from 1.2530 resistance.
It’s also approaching the neckline of what could be a 350-pip head and shoulders pattern.
That level comes in near 1.2300 this week.
If you saw Friday’s blog post, you know that a sustained break below 1.2300 confirms the head and shoulders and opens up 1.2200 and potentially 1.1900.
However, GBPUSD bears must first get through trend line support at 1.2365.
The level extends from the October low and connects with the March swing low.
The pound tested the level a couple of hours ago.
So a sustained break below the 1.2365 trend line opens up the 1.2300 neckline support.
Remember that the US Dollar Index (DXY) is also testing a critical level today at 104.25.
I mentioned this level in Saturday’s Weekly Forex Forecast.
It will take a sustained break above 104.25 this week to expose 105.00 and 105.60 for the DXY.
Dollar support comes in at 103.90, and the 103.50 yearly open.
I remain bullish on the dollar while the DXY is above the 103.50 level on a daily closing basis.
Turning back to GBPUSD, a sustained break below 1.2365, while the DXY breaks above 103.50, would likely send the pound to 1.2300.
But remember that 1.2300 is a critical GBPUSD level, and a sustained break below it is required to confirm the 350-pip head and shoulders pattern.
Alternatively, a rally from current levels and a break above 1.2530 would negate the bearish outlook for the pound.