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Author: AFTX   |   Latest post: Thu, 23 May 2019, 4:42 PM

 

GBPUSD: Pound Sterling Drops to New Monthly Low, Could Reach 2018 Low

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Earlier today, the British Pound slid to a new multi-month low, and it is now trading decidedly lower than its January 1 open price of 1.2754. I think that the price is short-term oversold, but the technical and macroeconomic outlook suggests that the GBPUSD could add to its losses in the weeks ahead.

PM May’s Brexit talks with Labour, the UK’s biggest opposition party, failed to materialize into a deal that the Labour Party could approve. Instead, Theresa May is said to bring back her old and already rejected deal for a fourth time to the House of Commons.

As the backing of the deal is minimal, even within her own camp more than 30 Tory MPs said that they would not support the new deal, it is unlikely that her deal will be allowed to pass. Instead, the focus is once again on the PM to resign. The 1922 Committee of Conservative MPs have scheduled a meeting for Wednesday, and some will push for rule changes to be able to oust Theresa May.

The lack of progress and the possibility of the next conservative leader being a Brexiteer is worrying investors, and as a response, they have sent GBPUSD lower as they start to price in a hard Brexit.

My view is that that a Brexiteer might still not be able to push through a no deal Brexit, given that there is very little support for that outcome, instead replacing Theresa May will probably bring further uncertainty to the market. In the end, it might be the EU that pulls the plug and forces the UK to leave. Alternatively, people are allowed to vote again.

In a YouGov poll published earlier this week about 61% of the replies said they would prefer to remain in the EU instead of accepting Theresa May’s deal, and 57 vs. 43 percent would prefer to remain in the EU over no-deal Brexit.

Technically, the GBPUSD outlook remains bearish, and on May 15 the price triggered a bearish head and shoulders pattern with a target of 1.2383. The pattern is made up by the January 28 and May 3 highs being the left and right shoulders respectively, and the March 13 high being the “head” of the pattern. The pattern is suggesting that GBPUSD could slide to 1.2383, but there are several lows on the way to the pattern target, with the first level being the January 2 low at 1.2582, followed by the December 2018 low at 1.2476, I think it is more reasonable to assume that traders will start to scale out from short-positions at these two levels.

The British pound should remain under pressure as long as the price trades below the May 21 high of 1.2813.  

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