The pound is sitting at a crossroad, waiting for a long-elusive Brexit resolution.
A last-minute effort to avoid what many consider a disastrous no-deal Brexit created the environment for UK Prime Minister Boris Johnson to edge toward a deal, though the latest reports indicate talks may now be at a standstill.
However, when renewed optimism on a settlement surfaced yesterday, sterling soared—jumping almost 5% to hit a five-month high. Here's what to look for to gauge Cable’s path going forward.
First, however, it’s necessary to understand where sterling is coming from, in order to attempt to figure out where it’s going next. While it’s true that the pound lost as much as a third of its value leading up to — and in the aftermath of — the Brexit vote in mid-2016, Cable was already in a clear downtrend from the time of the 2008 crash, from which the UK never recovered.
Political uncertainty has been the prime mover of the country’s currency, overshadowing better-than expected economic activity. Still, the pound has been falling since its April 2018 high.
In the above chart, of the UK's GDP since 2014, it's clear that growth has been mostly steady. Only recently has expansion shriveled and plunged even as political factors—Brexit-deal optimism—propelled sterling higher, contrary to the country's worst growth since 2013.
From a technical perspective, the pound jumped yesterday to close above both the 200 DMA and 50 WMA, as well as slightly above the downtrend line since the Apr. 18 high, for the first time. At this point, the currency is hovering at those levels, as traders wait for further clues about the path to the much sought-after deal between the UK and the EU.
Note, the pound paused above the medium-term downtrend line, which also happens to be the top of the short-term rising channel. And to emphasize just how sensitive this price level is, the 200 DMA/50 WMA showed up, making this a trend intersection.
Will the short-term uptrend reverse the medium-term downtrend, giving pound bulls an opening to take up the long-term downtrend since the crash of a generation, currently at 1.4000? Will a Brexit deal slip through Johnson’s fingers, pushing the pound back toward record lows below 1.2000?
Another leg up, which held after a pullback above the short-term rising channel top and broken 2008 downtrend line confluence, would dramatically increase the odds for a medium-term reversal. Alternatively, a long red candle would suggest a return to the bottom of the short-term rising channel, and if that broke, would retest the 1.2000 level.
Trading Strategies
Conservative traders should wait for a trend resolution as described in the previous paragraph.
Moderate traders could go long on an upside breakout of the short-term rising channel, followed by a pullback for a better entry and not necessarily for proof of support. Or they'd short if the long red candle materializes, following a return-move for reduced exposure but not necessarily for retesting the trend's integrity.
Aggressive traders may move on an upside breakout or the long red candle.
Trade Sample – Long Position Setup
Note: A trade sample is just a sample, not a trading lesson; it provides a crude sample demonstrating the basic principles to take into account, not trading advice