Chart Of The Day: Pound To Retest All-Time Low

The British economy shrank by 20.4% in April – the worst monthly contraction on record – an inevitable outcome that affected all areas of activity, after a full month in lockdown because of the coronavirus.

To appreciate the depth of the fall, it's three times worse than the contraction that ensued throughout the entire 2008-2009 economic slump. During that period, UK GDP declined by no more than 1% in a single month.

While, the worst single-month plunge is expected to be behind us, as the country eases lockdown, the UK economy will likely shrink 8% this year and is not expected to recover from the impact of coronavirus before 2023, according to Mark Gregory , EY's chief UK economist.

We anticipate it will be un uphill struggle for a country that has already been weighed down by an as-yet unresolved battle over Brexit. As well, the British pound has been falling for a third straight day, the longest losing streak for cable in a month. And technicals suggest there's more downside to come.

There's a rising wedge pattern forming on the charts: when highs and lows rise, but the lows go up faster.

While intuitively a bullish structure, the rising wedge implies both buyers and sellers agree that prices should head higher. But over-eagerness on behalf of buyers can leave them frustrated that sellers aren’t keeping pace, thereby allowing the price to accelerate even more quickly. Buyers reach a point at which they either have run out of capital, or motivation, thereby quashing demand.

If this scenario plays out, there would be a downside breakout, causing more buyers to give up on positions and encourage even further selling – by both original bears and tired bulls.

Rising wedges are interruptions in the trend. Therefore, a downside breakout would confirm a continued slide in the pound after the mind-boggling 12.5% plunge in just 8 sessions between March 10 and March 19, to the lowest levels in 30 years.

The rising wedge’s implied target is a retest of that 1.1409, March 20 multi-decade low. If there isn’t sufficient demand to support that price, we could expect a new wave of selloffs, which might attract traders seeking opportunities.

However, considering the price is forming a hammer on the charts, we might see another retest of the pattern top before a downside breakout. The hammer is complete only upon closing. The price may retest the bottom of the hammer at that point.

So, either allow for a wide breadth within your position, or only attempt it on the dip, knowing that that doesn’t always happen.

Trading Strategies/h2

• Conservative traders should wait till the price dips below 1.2000, clearing the 3% minimum filter to decrease the risk of a bear trap, as well as the presumed demand waiting around the May 18 low.
• Moderate traders would wait for the downside breakout, with at least a 2% penetration, doing their due diligence to limit being caught in a bear trap.
• Aggressive traders may enter a contrarian long position, hoping to catch the bounce off the bottom of the pattern. Only traders who have a plan in place which they’re committed to sticking to, and can withstand the loss of the position, should attempt this.

Trade Sample – Aggressive, Long Position/h2

• Entry: 1.2500 – above round number that’s higher than today’s low
• Stop-Loss: 1.2450 – 5 pips below today’s low
• Risk: 50 pips
• Target: 1.2700 – against the 200 DMA
• Reward: 200 pips
• Risk:Reward Ratio: 1:4

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Written By: Investing.com