I might be sitting on the sidelines during the EU referendum, but that’s not stopping me from looking at this sweet forex downtrend setup on Cable!
As you can see from the chart below, GBP/USD has failed to break above the 1.5700 handle. This is fortunate for the bears because it only means that the falling trend line that has been valid since August last year is still intact. Not only that, but it also looks like the daily chart’s 200 SMA throwing its weight against the pound bulls. Meanwhile, stochastic is about to reach the overbought area.
Fundamentally I think that there’s a bigger chance that the pound would trade lower than higher after this week’s EU referendum. According to my father in another life George Soros, a vote to Leave could drag the pound by at least 20% lower as “speculative forces” take advantage of market and voter uncertainty.
Even a vote to “Remain” is not without its uncertainties. Remember that U.K. PM Cameron had negotiated a deal with the EU in case Britain continues its membership with the bloc. If Britain does remain within the EU, the “special status” of the deal could question the singularity of the group’s policies.
Either way, it seems like sitting on the sidelines is the best option until the dust settles around the event. If it does look like the pound is set to lose more ground regardless of the results, then I’ll find an area to enter a short trade. On the other hand, a significant move higher could break the trend line and pave the way for a long-term reversal trade.
What do you think? Will Cable remain on its downtrend or will we see an upside breakout this week?