The pound fell today, hitting its lowest level since 1985, save for the 2016 flash-crash, after U.K. Prime Minister Boris Johnson said he'd sooner call for general elections than be forced to ask for another Brexit postponement. Macroeconomics, geopolitics and technical analysis all point to a downward trajectory for the once powerful European currency.
Before the 2008 crash, sterling traded above $2.1, which is more than 90 cents, or 43% higher. However, since 1985, the $1.4 level has been a staunch support that gave no quarter. This floor was breached for the first time in the aftermath of the 2016 Brexit vote.
According to technical dynamics that presume a broken support turns to resistance, it seems like everything is lining up for a resumption of the pound collapse: the pound challenged the newly-flipped resistance of $1.4 from January to April. However, it completed a H&S continuation pattern in May, demonstrating that what has been a floor for 31 years has now become a ceiling.
GBP has been down-trending within a clearly defined channel since the January-May H&S. The channel’s resistance is underlined by the 50 DMA. Today’s trading posted a new trough in the downtrend.
Despite that, both the MACD and RSI are far from oversold levels, leaving a lot of room for continued decline with no correction. Additionally, both indicators recently provided sell signals.
Trading Strategies
Conservative traders would wait for a close near the bottom of the session, to bolster the new trough’s signal of a continued downtrend, followed by a correction to the top of the channel that would prove its resistance, with at least one long red candle engulfing a green or small candle of either color.
Moderate traders may be content with the intraday lower trough, followed by the upward correction toward the channel top, but not necessarily for trend confirmation as much as for a better entry.
Trade Sample – Short Position Setup
Aggressive traders may enter a contrarian long position, hoping for a dead cat bounce after a straight five-day decline, which is testing the August lows, the previous trough. Then, they could short along with moderate traders.
Trade Sample – Long Position Setup
- Entry: 1.1990