As we move closer to Thursday's historic referendum in the UK, so-called Brexit, that would decide the fate of its membership in the European Union, most investors are seen struggling with the question that how will markets react to the outcome. Markets have already been seesawing amid high volatility with changing sentiment on various poll results that still suggests a tight battle between the 'Leave' and 'Remain' camps. The GBP/USD pair, which best reflects investor sentiment, has been exclusively driven by developments surrounding the crucial event.
I have tried to lay down some important technical levels / formations for the GBP/USD pair for both the possible outcomes; i.e. in the event voters favor a Brexit or if they support to remain with the EU, or Bremain.
Brexit – Bearish scenario
Except for a sharp slide in late Feb., the pair has been oscillating within an equidistance ascending trend-channel, with the trend-channel resistance coinciding with 200-day SMA around 1.4700-20 region. The ascending channel when considered in conjunction with the pair's sharp slide from 2015 highs seems to be forming a continuation chart pattern, Flag, marking a consolidation phase before the pair resumes its previous weakening trend. However, since the range-bound movement is more than 12 weeks old, it could also be classified as a rectangle, which again is a continuation pattern that points to a pause in the medium-longer term downtrend. However, the bearish continuation pattern would be confirmed only when the pair decisively breaks below 1.4000 important support.
Levels to watch
If there is a vote to leave the EU, the GBP/USD pair could immediately slump below the 1.4000 important support and should continue weakening over the next few weeks and months. A confirmation of the break-down below 1.4000 handle, would accelerate the slide and immediately expose 2016 lows support near 1.3850-40 region. A follow through selling pressure has the potential to continue dragging the pair further towards 2009 swing lows support around 1.3500 region, with some intermediate support around 1.3680-75 region.
The pair could be expected to witness an unprecedented fall to 1.3300 (estimated decline post rectangular formation break-down) and possibly till 1.2300 level, expected price target of the bearish flag chart-pattern.
Bremain – Bullish argument
Going into the big event, the GBP/USD pair has already witnessed a sharp run-up of nearly 700-pips from the vicinity of 1.4000 handle and traded above 200-day SMA for the first time since Nov. 2015, virtually pricing-in a win for the 'Remain' campaign. Last week's bounce-off 1.4000 psychological mark constituted towards formation of a bullish reversal, double-bottom chart pattern. However, the pair has repeatedly failed to sustain its strength above 1.4700 handle but attempted to conquer 200-day SMA, which would reinforce medium-term bullish momentum. Hence, a convincing break above 1.4700 (200-day SMA region) would confirm the bullish chart pattern and pave way for further appreciating move for the pair.
Levels to watch
Bulls should wait for a sustained momentum above 1.4750, above which the pair is likely to immediately gap higher to 1.4880-1.4900 resistance, marking 50% Fibonacci retracement level of 1.5930-1.3838 downfall. The momentum should further get extended, beyond 1.5000 psychological mark resistance, towards 61.8% Fibonacci retracement level resistance near 1.5100 area. Eventually the pair could rise back to its next major psychological mark resistance around 1.5500 handle, also coinciding with the estimated price target of the bullish double-bottom chart pattern.
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