GBP/USD to retest the flash crash lows?

The UK GBP’s recent ‘short squeeze’ recovery from the flash crash has stalled at an all-important 50 % retracement level. The path of least resistance is now clearly to the downside, and a retest of the flash crash lows touched on the 26th of September is becoming increasingly likely.

Despite the continued efforts of the Bank of England to support the bond markets, yields are still edging up. Yet the currency is taking no comfort. This is a consequence of two main factors. Firstly the markets are not liking what they are seeing from the UK government in terms of policy. They have taken zero confidence from the "trickle-down" approach intended to spur growth enabling a balancing of the books. And possibly more importantly the continued strength of the USD. The Fed has certainly led the way in the rate hiking cycle in their mission to battling rampant inflation. The general belief is that they will continue on their aggressive path. So, in theory, whatever the UK Bank of England will do with their monetary policy it is likely to be cancelled out by the more aggressive moves from the FED.

Technical traders love to see ‘gaps’ filled. The flash crash on September 26 saw sterling drop almost 8% in a day. That is huge for a G8 currency. The short traders quickly covered their shorts seeing the rally back above to pre-mini budget levels in a matter of days. However, the fundamentals still have not changed. Now there is relative calm in the currency markets the move is back on for a retest. The bearish engulfing pattern seen at the 50% level was a sign for us technical traders that the recovery was done. Selling short with stops above engulfing pattern, and 1.0350 as a target has a decent risk-reward play.