British pound bouncing – is it real?
The British pound has bounced the last couple of days, after falling rather drastically. Previously, we had formed a descending triangle and broke through it a couple of days ago at the 1.30 region. By doing so, it shows an extreme amount of bearishness in Sterling, but at the end of the day the question really isn’t so much whether of the breakdown mattered, but what it is that we need to do next.
keep in mind that there is significant resistance above, which was also supported at the 1.30 level. At that point in time, we will need to make serious decisions as to what we are going to do next. I suspect that selling at the 1.30 level will be rather drastic, especially if we get some type of negative headline out there when it comes to financial markets. Ultimately, this is a market that has a lot of moving pieces, and with the uncertainty around it, it’s difficult to imagine a scenario where you can hang onto gains for a long term.
Obviously, the Brexit is a big problem as we don’t know what is going to happen next, with the delay of course helping stabilize the situation, but we don’t have any type of clarity. That lack of clarity is going to continue to cause major issues. I suspect that as long as the Brexit is uncertain, it’s going to be difficult for the British pound to hang onto gains for any long amount of time. This is especially true against the US dollar, which of course has had a significant amount of strength.
The descending triangle above measures for a move much lower, so this bounce could just simply be a retest of the bottom. The 100% Fibonacci retracement level underneath is at the 1.28 level, an area that has recently seen a hammer form on the weekly chart. If we break down below there, then we can fulfill the very bottom of the descending triangle target, which is closer to the 1.26 level. John that, there is an also a descending trend line from past that should show plenty of support as well.
Waiting for good news
The Brexit will of course cause a lot of movement in this pair, and there will of course be a lot of headlines out there that will cause a lot of volatility. However, if the Brexit finally get solved, that should send the British pound much higher as it is historically cheap. Beyond that, if we get some type of movement in global trade that is somewhat positive, that will put downward pressure on the greenback, adding more upward pressure here.
The main take away
Short-term trading will continue to push this market around, and rallies will probably be sold. That being said, if we get the right headline that changes the entire attitude of the market and will make the pear extraordinarily bullish. The levels that we see now are historically cheap by any measure, so as we had seen in the past, markets won’t hesitate to skyrocket on good news.