How low will Sterling go?

Brexit is now precipitating a full-scale political crisis. Threats, counter-threats, and election rumours are all swirling round the capital and beyond. What is happening, people wonder?

A week ago, I was writing about how difficult it was to predict the Brexit outcome. Indeed. Events over the past week added to the confusion. Better to stick with price-based methods than with discretionary trading because of this uncertainty. If you had followed this advice, you would still be short Pound Sterling, which is dropping like a stone this week.

Against the US Dollar, the rate is now threatening to break the key 1.200 support level. This is a psychological level for many investors. If this level goes, watch for a rapid descent into parity. On the way there, watch for a rebound off the potential support at 1.150 (see Featured Chart).

Versus the Euro, the rate is amidst a rebound because a) the rate’s decline below 1.100 was very oversold and, b) European macro headlines are poor, too. Note how climactic was the drop from 1.120 to 1.060. Still, GBP’s trend is unmistakably bearish and I expect choppy trading here.

In this uncertain period, GBP is doing poorly against safe haven currencies like the Swiss Franc and Japanese Yen. Versus the pattern, GBPJPY has been trending below the 50-day moving average consistently since May and new long-term lows appear probable (see below). Next support is estimated at 1.250.

In sum, Sterling’s Brexit-induced volatility is like to rise further as Parliament returns from the summer break. At this point it would be better to stick with technical trend trading aided by indicators like moving average because of the past-paced Brexit. How far will Sterling drop? Will we see a ‘flash crash’ here? Nobody knows. Better to ride current trends than picking bottoms.

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