The markets have reopened after the Christmas break, and an interesting setup can be observed on the British Pound to Canadian Dollar (GBP/CAD) pair. The pair is forming a textbook head and shoulders pattern, highlighted within the green rectangle. This classic bearish formation suggests a potential shift in sentiment, and all eyes are on the neckline, marked with a red horizontal line.
Currently, the price appears to have completed the right shoulder and is now testing the critical red neckline. A decisive breakout below the neckline, confirmed by a daily close, would activate the bearish setup and serve as a strong signal to sell. In such a scenario, traders could look for significant downward movement, with a promising risk-to-reward ratio.
On the other hand, a surprise bullish move cannot be ruled out. If the price breaks above the orange resistance, which aligns with the highs of the left and right shoulders, it would invalidate the head and shoulders pattern and signal renewed bullish momentum. This would serve as an invitation to go long and could lead to an upward rally.
At this critical juncture, it’s essential to monitor how the price reacts to these key levels. The direction chosen here could define the trend for the days ahead, so it’s an exciting moment for traders closely following GBP/CAD.