UK election: Impact on the GBPUSD

UK election special:
Why this election could be the turning point for the pound and what it may mean for the long-term UK political landscape and its position in the EU.

Technical View: GBPUSD 

To paraphrase author Charles Dickens, 2015 has been “the best of times and the worst of times” for the British pound. Q1 was the proverbial “winter of despair” for the UK currency, with GBPUSD shedding nearly 1,000 pips from 1.5600 to a five year low near 1.4600 in mid-March. Looking to the weekly chart, this sell-off did substantial technical damage: the 1.48-49 zone represented the double bottom from mid-2013 as well as an unusually tight confluence of major Fibonacci retracement levels from the 61.8% retracement of the entire ’09-’14 rally (AD) converges and the 78.6% retracement of the ’10-’14 upswing.

The medium-term technical bias still remains lower. One method of gauging the strength of a market’s buying and selling pressure is to measure the depth of the counter-trend moves: in a strongly trending market, a currency will typically retrace only a small portion of the previous move (23.6-38.2%), while in a more balanced market it’s common to see deeper retracements (61.8-78.6%). In this case, GBPUSD’s January-February bounce barely reached its shallow 23.6% Fibonacci retracement before reversing and quickly falling to new lows in March, showing that there is little appetite to buy the pair.

In the short-term though, the chart is sending out mixed signals. As a possible sign for optimism, the pair’s weekly RSI has put in potential bullish divergence at the most recent low, suggesting that the selling momentum may be fading. That said, previous support in the 1.48-1.50 zone should now provide resistance on any near-term rallies in GBPUSD, as could the downward sloping 10-week (50-day) moving average near 1.5100. As long as rates remain below those levels, we believe the path of least resistance will remain to the downside, especially as the political uncertainty swirls in the run-up to the election. If we do see a pound-negative election result (a hung parliament or, to a lesser extent, a fractious coalition), GBPUSD could resume its downtrend for a possible test of the next level of converging previous / Fibonacci support in the 1.42-1.43 area, where the 127.2% Fibonacci extension of CD, May 2010 low at point B, and 78.6% Fibonacci retracement of AD all converge.