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GBP/USD Technical Analysis: Brexit Prospects Bring Pain to the British Pound

GBP/USD Technical Analysis: Brexit Prospects Bring Pain to the British Pound

2016-02-24 19:24:00
James Stanley, Currency Strategist
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Talking Points:

  • GBP/USD Technical Strategy: Short from last article limited out. Looking for fresh short positions off of 1.4000.
  • Growing prospects of a Brexit will likely continue to bring volatility to GBP, but be careful of getting married to any positions here.
  • The GBP-complex will likely remain volatile well into the June 23rd referendum vote. Traders should address their risk management if doing anything in the Sterling, and if you’re looking for directional cues as we used in the last article, our SSI indicator can be helpful.

Headline writers the world-around have rejoiced at the multiple opportunities that have been afforded to allude to the cheapened double entendre of ‘the pound is getting pounded.’ And while this may be ‘cute,’ it completely skirts the issue: GBP isn’t getting simply ‘pounded.’ It’s falling off a cliff and shredding through support levels as if they were non-existent. This is panic, front-and-center, and it’s being fed by heightened political risk which could entail an entire series of additional headwinds.

In our last article we looked at a conditional short-setup off of the key Fibonacci level at 1.4371. This is the 76.4% retracement of the ‘secondary’ move in the pair, taking the Financial Collapse low to the 2014 high. As we had looked at, the entry was planned around resistance on the four-hour chart showing up at 1.4371, which happened a day and a half later. Ahead of the close on Friday of last week, that position wasn’t looking as attractive, as a quick 100-pip gain was back to break-even on news that Mr. Cameron had reached a deal with European leadership on an enhanced set of terms to bring to voters in a referendum later this year.

But Boris Johnson did the heavy lifting for the position over the weekend when the Mayor of London came out in support of a Brexit. Matters disintegrated quickly after that as investors around the world have begun to realize that the European Union may be a little less lively and hopeful than before, and this may be heard from British voters when the actual referendum vote takes place in four months. This has led to panic-like moves in the Sterling that limited out the previous position fairly quickly and now this move has turned into a headline. And in the UK, this is even a social event as such a big psychological level will elicit attention from even those that couldn’t care less about markets. And this will likely rest heavy on voters’ minds as we near that June referendum.

But this still does not mean that a trader should abandon their better senses. The 30-year low at 1.3500 sits ominously below current price action, almost beckoning for traders to get short. But even in this situation, where we have a bleeding market that could foreseeably bleed for a while longer, traders need to exercise prudence. Throwing out a position and just hoping that a trend will continue while already at a low could be a very unsavory strategy. We still have to manage risk, even in the direction of the trend and especially after a burst-like move in the trend-side direction.

The level of interest moving forward is the 1.4000 psychological level. Levels of this nature will often build up considerable sitting orders while garnering quite a bit of interest. Even when prices cross through such a level in a concerted fashion, it’s not abnormal to see price action revisit. That’s what traders can watch for here: Look for resistance to develop in the 1.4000 vicinity before triggering a short position. Place a stop above the wick, and look for the down-trend to continue lower.

On the profit target side, traders could look to 1.3853, which is the 27.2% extension of the tertiary major move (2014 high to the 2015 low), followed by 1.3750 (major psychological level), and then that 1.3500 level, which is the 30-year low as well as being a major psychological level.

GBP/USD Technical Analysis: Brexit Prospects Bring Pain to the British Pound

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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