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The Meaning Behind $1.38 GBP/USD

What has happened to all of the prophetic statements about the British pound falling below $1.15/$1.10 and remaining there?

After crashing last year to $1.1840, a 31-year low (some prices suggest $1.1500), it is now up by 12%. The pound is the only currency in G10 FX to rise against the US dollar over the past 3 months. Will the pound recover above the $1.50 level next year? Or will Brexit dynamics force the currency back under $1.20? In this piece, I shall focus on the technical forces shaping the GBP/USD pair in the medium run and will not discuss macro fundamentals, Brexit or political risk.

Different catalysts, one support

The most striking development in the 35-year chart of the GBP/USD below is the manner in which the $1.3800 support was finally broken in 2016 after three failed attempts spanning over a 7-8 year cycle. The duration of the cycle is not as important as the recurring emergence of $1.38 to act as a crucial foundation in each of the selling attacks sustained by the pound.

The two episodes of 1992 and 2016 share similar catalysts in the sense that they were both triggered by a singular event — the UK’s decision to abandon supporting the pound vs the Deutsche mark under the Exchange Rate Mechanism in 1992; and the fateful Brexit referendum of June 2016, ending Britain’s 40-year economic and political relationship with the European Union. Indeed, the pound had been weakening considerably ahead of each of those events, but both occasions were highlighted by a singular announcement/outcome.

The sterling’s selloffs of 2000-2001 and 2007-2008 were triggered by global economic catalysts as well as UK-specific events, yet, are also highlighted by the $1.38 support.

After the break

The enormity of the Brexit implications is underlined by the fact that $1.38 had finally floundered after surviving three major attacks. Keeping fundamental factors and economic/political analysis aside, technical analysis raises 2 questions: Will GBP/USD return to $1.37-$1.38? And will GBP/USD succeed in breaking above $1.38? The answer to the first question is strong "yes". As long as $1.28 is sustained and the 200-day MA holds, the probability of regaining $1.37 has more than 75% chance probability of occurring. A breach above $1.38 would mean the 2nd violation of a level that once held for more than three decades. In order for such occurrence to manifest itself, chances remain below 30%.

Ashraf Laidi
Ashraf Laidihttp://ashraflaidi.com/
Ashraf Laidi is an independent strategist and trader, founder of Intermarket Strategy Ltd and author of "Currency Trading & Intermarket Analysis". He is the former chief global strategist at City Index / FX Solutions, where he focused on foreign exchange and global macro developments pertaining to central bank policies, sovereign debt and intermarket dynamics. Ashraf had also served as Chief Strategist at CMC Markets, where he headed a global team of analysts and led seminars and trainings in four continents. His insights on currencies and commodities won him several #1 rankings with FXWeek and Reuters. Prior to CMC Markets, Laidi monitored the performance of a multi-FX portfolio at the United Nations, assessed sovereign and project investment risk with Hagler Bailly and the World Bank, and analyzed emerging market bonds at Reuters. Laidi also created the first 24-hour currency web site for traders and researchers alike on the eve of the creation of the euro. Laidi's analysis of currency markets stand out based on his distinct style in bridging the fundamental and technical aspects of the markets. Laidi regularly appears on CNBC TV (US, Europe, Arabia and Asia/Pacific), Bloomberg TV (US, Asia/Pacific, France and Spain), BNN, PBSs Nightly Business Report, and BBC. His insights also appear in the Financial Times, the Wall Street Journal and Barrons. He has given numerous interviews and lectures in Arabic, French, and to audiences spanning from Canada, Central America and Asia/Pacific.

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