GBP/USD: Expect Further Downside

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Includes: DGBP, FXB, GBB, UGBP
by: Hedge Insider
Summary

GBP/USD has performed well over the past few weeks.

However, this positive retracement from a previously overwhelmingly bearish trend was expected by this author.

Traders should now expect limited upside, as the GBP/USD pair is likely to resume its downside trajectory soon.

Considering the March 29, 2019 Brexit deadline, traders should remain wary of the GBP/USD returning to the 1.22 level last seen in 2017.

The pound sterling has risen against the dollar for the past few weeks in spite of the generally bearish sentiment that has cast itself against the pound sterling since at least October (and more broadly since April 2018). However, despite the recent uplift, I did predict in a previous article (dated December 16, 2018) this would occur.

In that article, I anticipated that GBP/USD could retrace positively to as high as 1.29. With GBP/USD now trading at approximately 1.274 (up from around 1.258 at the time I wrote my last GBP/USD article), the upside potential is now limited. Nevertheless, to complete the retracement, traders should be open to seeing GBP/USD trading to 1.28550, and possibly overshooting to the 1.29 level to complete the retracement.

The chart below depicts the current price for GBP/USD on the weekly chart, complete with the Fibonacci retracement which is pinned to the levels of 1.30229 and 1.25834, which represent the intra-week opening price for the week commencing November 5, 2018 and the intra-week closing price for the week commencing December 10, 2018.

GBP/USD Retracement (Chart created by the author using charting tools provided by TradingView.com. This applies to all further charts presented in this article hereafter.)

As the chart shows at the 0.618 level, GBP/USD could still be targeting 1.28550. However, given that GBP/USD is likely to resume the bearish trend thereafter, the pair will likely become a short from such levels.

Indeed, unless GBP/USD soars to overtake 1.30229, the lower high will help to confirm further bearishness. The chart below supports this thesis, showing the pound sterling struggling to regain ground (on the daily candlestick chart) relative to the Japanese yen (green line), Swiss franc (purple line) and euros (blue line).

GBP/USD FX Comparisons It could be argued that the pound is not doing so badly recently relative to currencies such as the Canadian dollar. However, the Canadian dollar is a difficult currency to draw useful comparisons to, due to its strong correlation with oil, and in turn the uncertainty of the oil price. What we can see from the above chart is the pound sterling is not strengthening against yen, francs or euros: this is a red flag for GBP/USD.

Nevertheless, let us assume that GBP/USD manages to find at least 1.28550. At this point, where could the GBP/USD target? The same intraday low of 1.24765 achieved on December 12, 2018 would be a starting point. This level is marked using the black line in the daily candlestick chart below.

GBP/USD Possible Low The 1.24765 would be a natural target after reversing this short-term positive retracement. However, could the GBP/USD pair find even lower ground? It is of the author's opinion that yes, we could answer in the affirmative. Using the monthly candlestick chart, we can draw our attention to the 1.22055 level, which represents the monthly opening price for the month which commenced November 1, 2016.

GBP/USD 1.22 It is difficult to place much significance on this level, other than the fact that it was a long-term source of liquidity during the end of 2016 and beginning of 2017, and that most recently we have seen two months within which the opening and closing prices were very similar (despite fairly sizable trading ranges).

In other words, GBP/USD has entered a period of indecisiveness as the as Britain prepares to leave the EU on March 29, 2019. Yet given the long-term trend and apparent target (judging from the multi-month direction), the bearish bias on the pound sterling remains intact, likely for at least the next month or two (subject to further analysis as price develops over the next few weeks).

It is the author's opinion that traders should be extremely wary of buying GBP/USD up to higher levels, as the recent positive retracement is unlikely to hold for long. Traders should not rule out, and perhaps should even expect, to see GBP/USD fall even further to 1.22 before the Brexit deadline date of March 29, 2019.

This view might also have negative implications for UK equities (i.e. FTSE 100) over the next few weeks and months. If the pound sterling continues to suffer, sophisticated (and international) investors may address this renewed threat on the pound by selling UK equities, putting further pressure on UK equities.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.