Brexit bloodbath drives GBP/USD to 7-year lows

Mark you calendars for June 23rd!

Beyond representing one of the first days of Summer in the Northern hemisphere, that’s the date scheduled for the long-awaited “Brexit” vote on whether the UK will remain part of the European Union.

It’s beem an unusually busy weekend on the geopolitical front for pound watchers. On Friday, UK PM David Cameron secured an agreement with EU officials changing the details of Britain’s “special status” within the EU, with specific tweaks to immigration, child benefits, political integration, and emergency safeguards for London companies. Predictably, Mr. Cameron also came out in favor of keeping the UK in the EU over the weekend, with a spokesman statingt that “we want Britain to have the best of both worlds: all the advantages of the jobs and investment that come with being in the EU, without the downsides of being in the euro and open borders.”

Unfortunately, it’s shaping up to be a contentious four months of campaigning. Already, the battle lines are being drawn, and Sunday brought a big early win for the “Leave” campaign as London’s popular Mayor Boris Johnson came out in favor of Brexit. Johnson noted, “I will be advocating Vote Leave … because I want a better deal for the people of this country, to save them money and to take control. That is really what this is all about.” As of writing, opinion polls are still showing a relatively split populace with a slight edge toward the UK remaining in the European Union, but 15-20% of voters are still undecided, so the vote could swing either way over the coming months.

Technical view: GBP/USD

If there’s one thing that traders hate, it’s uncertainty, and this weekend’s developments sharply increased the uncertainty surrounding Brexit. GBP/USD has collapsed more than 300 pips from Friday’s close over the course of today’s Asian and early European session trade, making it the worst selloff for the pair since the 2010 general election, which resulted in a its own heap of political uncertainty (a hung parliament).

Now, GBP/USD is trading at its lowest level since 2009, and a close near current levels could open the door for more pain as we move through this week. Looking at the secondary indicators, the daily MACD is starting to roll over once again, showing that the momentum remains in favor of the bears, while the RSI indicator is currently holding near 35. There are two ways to interpret the current positioning of the RSI: it could either signal the potential for more weakness in cable, seeing as it’s not even oversold yet, or it could create a bullish divergence if we see the exchange rate form a near-term bottom.

While it’s difficult to handicap the near-term price action, we’re inclined to look for more downside in GBP/USD given the ongoing uncertainty and bearish momentum. A close below 1.4080 would likely open the door for a run down to psychological support at 1.40, if not lower. On the other hand, the unit could quickly squeeze higher to reverse today’s losses and trade back toward 1.42 or 1.43 if the selling momentum falters at the key 1.4080 support level.