How far can a sterling recovery go?

Jason Sen

It has now been 19 months since the Brexit referendum started a collapse in the British pound. We have made a gradual recovery in recent months. So let’s look at some GBP pairs to see how much further sterling can rise.

GBP/USD had already fallen from a 2014 high of 1.7191 to a low of 1.3833 just 20 months later. So the pair was already in a negative trend. From a Brexit peak of 1.5018 the pair collapsed over 350 pips in just four months. From this low at 1.1450 the pair has made significant gains. This month we beat the 2017 high of 1.3656 to reach 1.4048, as I write.

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Be aware that we are running into important one-year trendline resistance in severely overbought conditions. You can see this in the chart below. We must sustain a break above 1.4100 to target the 50% Fibonacci at 1.4321, and the 200-week moving average just above at 1.4370/1.4390.

GBP/JPY has built a slow-but-steady recovery from the low in October 2016 at 124.12. This month we have made an important break above the 500-week moving average, and 38.2% Fibonacci resistance just above at 151.50, to reach 155.38.

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We have a minor negative candle after Tuesday’s trading. This may trigger short-term profit-taking in severely overbought conditions. However, as long as we hold above strong support at 151.00/150.50 on a correction, bulls will remain in control.

GBP/CAD has made a recovery from the recent September low of 1.5808 to a peak in December of 1.7465. A one-month correction followed, but we have recovered quickly this month to re-test the December peak. This does not look like a particularly impressive recovery. Note, however, the pair is well above the 100, 200 and 500-day moving averages in a clear four-month bull trend.

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We are also back above the 100-week moving average for the first time in two years. It looks like we can hold above the 500-week moving average at this stage. A push up through 1.7500 does look likely and should target longer-term 38.2% Fibonacci resistance at 1.7690/1.7700 before the 2017 peak at 1.7820/1.7853.

GBP/EUR had already fallen from a 2015 peak of 1.4415 by the time of the referendum, when it was trading close to 1.3200. After some stability in early 2017 the pair collapsed again to a low of 1.0743 by the summer, just in time for the holiday period! By late September we had recovered quickly to 1.1432. However, with recent euro strength, gains were capped at 1.1506 in December.

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As you can see in the weekly chart above, if we can get back into the 1.1500 area we will run into Fibonacci resistance at 1.1587. This is just below the 100-week moving average which is currently at 1.1690.

Just to backtrack a little to the daily chart below, we see the four-month channel with the upper trendline located around the 1.1500 area. This adds to the challenge facing bulls. Failure to beat this tricky resistance is likely to see the pair head back towards a cluster of moving average support in the 1.1310/1.1280 area.

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GBP/AUD trended mostly sideways from the last quarter of 2016 for a year up until the last quarter of 2017. Although we do not appear to have strong upward momentum, we do appear to be stabilising above the 23.6% Fibonacci level of 1.7339, and the 100-week moving average just below the 1.7330 area.

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This is mildly encouraging – if it can be sustained of course. A push through 500-week moving average resistance at 1.7740/50 would target the 2017 high at 1.7996. We then run into extremely strong resistance at 1.8300/1.8350.

Jason Sen

Technical Analyst & Trader

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