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GBP/USD and Brexit: changing karma

GBP/USD and Brexit: changing karma

Information is not investment advice

Observations

Here are some interesting technical facts about the GBP/USD observable in the chat below.

First, immediately after the Brexit vote, GBP/USD dropped from 1.4750 to 1.2000 losing almost 20% of its value (1).

Second, after a year-long retrace upwards (that never managed to get back up to 1.4750), the upside of GBP/USD stabilized at 1.3400 and has never been crossed since April 2018 (2).

Third, while the resistance has been granite-fixed, the bottom has been going deeper and deeper, renewing lows and expanding the span of fluctuation (3).

Taken alone, these facts together tell about a definite weakening of the GBP that comes as a direct consequence of the Brexit vote.

10.png

On a larger scale, we see a sharp drop (1) to 1.4750 in 2008 which is “excusable” for the worldwide crisis. After that, there were five years of sideways movement (2) within the channel supported by 1.4750 and capped 1.7200.

Eventually, the GBP lost even more value against the USD (4) coming down to the current 1.2000 which seems to be a firm ground so far.

All of those movements were taking place under a fixed straight-line downtrend (3). That suggests that in the long term, GBP/USD is unlikely to move back up. More probably, it will stay at the bottom – at least, while the Brexit finalizes.

11.png

Conclusions

The long-term view shows a prevalent downtrend for the GBP against the USD. The tactical view shows increased volatility. Altogether, these are typical attributes to the exotic currencies representing developing economies. May that be the case for the GBP? Well, it is definitely still much stronger than the Russian ruble of Brazilian real, for example. But the inner market mechanism converts it now into something quite far away from a central G5/G10 currency, and definitely not a pillar of firmness in the world of Forex.

In other words, the GBP is becoming weak. Will it drop below 1.2000? If Brexit doesn't land well, definitely it will. If Brexit goes smooth (which is 50/50) - it will probably float at 1.2000 or slightly above. Will it ever launch back up to where it used to be? Unlikely. Times are changing – the UK economy is shrinking, and the virus damage accelerated this process. 

Therefore, keep 1.3400 and 1.2800 in mind as tactical resistance levels, and 1.2000 as the key support level. Gravity is on the side of the latter.  

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