British pound trying to find a bottom

Kate Leaman
Kate Leaman

20 May 2019

GBP/USD

The British pound fell a bit during the trading session on Monday, wiping out a bit of the gains during the trading session. The question now is whether or not this is a sign that we are going to go much lower, or are we going to continue to go back and forth and try to find some type of bottom?

We are searching for the bottom

At this point in time, it appears that the British pound is oversold by just about any metric you use. After all, this has been a precipitous fall for over 300 pips over the last handful of days, and it’s very likely that we are starting to run out of sellers. There are a lot of concerns when it comes to whether or not Theresa May will resign, and probably more to the point: who will replace her? Overall, this is a marketplace that has made its reaction to this note, so now we are looking for the next catalyst, be it good or bad.

When I look at the longer-term charts, I believe there is a significant amount of support at the 1.27 level that extends down to the 1.25 handle. This is a thick barrier of value that I believe will show itself in the market. If we break down below the 1.27 level then I think we should see that the selling to slow down a bit, and at that point I would wait for some type of supportive candle to take advantage of on the daily chart. Don’t get me wrong, I’m not necessarily going to jump in with both feet and throw a lot of money at the market, but I would be interested in something along the lines of a hammer on the daily close.

At that point, it’s very likely that we will have found the bottom of the recent sell off, and therefore a lot of value hunters will come in and take control of this market which has been a bit over reactive resistance.

gbp/usd chart

GBP/USD chart

Potential levels of interest

So the great thing about this pair is that it is oversold and just about everybody knows that. There is a previous downtrend line that should be supportive near the 1.25 handle, it of course that is a large, round, psychologically significant figure. At this point, I would be very cautious about selling, because quite frankly you are entering the trade far too late.

With that being said, then I’m looking for a buying opportunity. If we break above the highs for the trading session on Monday, which is essentially the 1.2750 level, I’d be a buyer as we should then go to the 1.30 level. Alternately, if we break down below the 1.27 level then I will wait for that supportive daily candle stick underneath to take advantage of somewhere closer to the 1.25 handle, and start buying, waiting for a move to the 1.30 level as well.

The main take away

The main take away of course is that we need to be very patient and wait for a buying opportunity. It will present itself, and therefore give us an opportunity to pick up good profit. However, we may need to wait several days, simply look at the daily candle stick to give you signals.

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