Sterling retreated from its 5-month high ahead of a series of UK parliament votes later today on Prime Minister Boris Johnson's Brexit deal. Traders are now holding nervous fingers above their buy and sell buttons as they await the outcome. Below are some key technical pressure points to consider.
Naturally, Cable is expected to surge if the Houses of Parliament finally succeed in passing legislation for a Brexit deal. On the other hand, the pound is anticipated to plunge if the country fails again to decide on what's become arguably the U.K.'s most divisive issue since World War II.
The following technical analysis seeks to recognize the likely pressure points worthy of consideration as levels of supply and demand. When they hold, they suggest strength and when they fail, they increase the chances of a further decline.
The pound finally broke through its downtrend line since mid-April 2018. However, its long-term downtrend since the 2008 crash looms large, though far above current levels, at 1.3800. While the currency crossed above the 200 DMA in the current rally, it paused below the 100 and the 200 weekly moving averages, above the 1.3000 psychological round number.
All these technical gauges of various periods and trends suggest considerable conflicting interest — the recipe for extreme volatility — reflecting the geopolitical context. However, at times, especially extreme ones, the technicals take on a life of their own, as human nature overshadows cold logic. That phenomenon is magnified when the so-called fundamentals are shrouded by uncertainty, such as that caused by the Brexit saga.
The RSI has been curving down at the top of its rising channel since July, increasing the potential for a pullback, but still within an uptrend. And that’s the key.
The 1.27 level is the crosspoint of the top of the short-term rising channel, the 200 DMA and the downtrend line since April. If the pound finds support at this technical juncture it may suggest investors are accumulating positions for another rally, even if the current vote ends up with another failure for Boris Johnson.
On the other hand, if the Brexit bill does pass, paving the way for an orderly exit from the European Union, traders would do well to be mindful of the 1.35 level — another pressure point, where lies the 2019 peak below the long term downtrend line since the 2008 crash.
Trading Strategies – Long Position Setup
Since it will be a while before the pound gets to the 1.35 levels, should there be a positive Brexit outcome, we will here only address another Brexit fail and the probable resulting drop in the pound.
Conservative traders may consider a long position after the currency closes above the 2019 high.
Moderate traders would enter a position if the pair falls toward the 1.2800 pressure point and rallies again, to close above the 1.3000 level.
Aggressive traders may risk a long position upon consolidation above the pressure point below.
Trade Sample
Note: A trade sample is intended to help highlight important trade elements. It's impossible to predict the future, and the sample may fail. Trading is playing the odds with multiple traders.