Trading GBP/USD a week After the Flash Crash

pound to dollar exchange rate 1

 

One week after the flash crash of Friday the 7th October and Sterling is still looking weak.

The pressure eased a little on Wednesday after the Pound recovered as a result of news that the UK Prime Minister Theresa May would be allowing parliament to scrutinise her Brexit negotiation plans.

However, the problem for traders is that the UK currency has become one that is largely driven by political sentiment.

For instance, the currency looks pressured ahead of the weekend on news that the President of the European Commission Donald Tusk has warned that there is only the choice of no Brexit or hard-Brexit for Britain. 

What this means exactly quite unclear; indeed so is most talk of Brexit coming from politicians.

From an FX perspective this leaves traders disadvantaged as technical indicators have been left undermined.

Nevertheless, there are some levels starting to appear which could gives clues on future direction.  

Strategic Levels Cited by Institutional Analysts

Alex Rudolph at Commerzbank says:

"Last week GBP/USD has seen a massive spike lower to reach the 1.1938 level (according to our charting software CQG). The currency pair briefly dipped to 1.2090 on October 11 (according to CQG).

"It needs to remain above this level for our anticipated small recovery rally to ensue.

"Since three inside days were made in the past few days a break below 1.2090 would almost certainly mean a continuation of the descent with the 1.2000 mark then being back in the picture. Similarly a break above the 1.2279 October 13 inside day high would point towards higher levels being seen with the 1.2500 mark being a possible target area.

"We also have a time zone gap back to 1.2639. We would allow for this to be partially filled and note the Elliott wave count is suggesting a rally to 1.2625 in the course of the weeks ahead."

BNP Paribas see the GBP/USD as extremely undervalued.

According to their CLEER model for determining fair value the 1.22 level represents the ‘worst case scenario’ level for GBP/USD, both from a ‘Hard Brexit’ perspective and monetary policy view too.

Given the pound traded below that level on Friday after reaching spike lows of 1.18 or even lower on some platforms, the pair appears undervalued and therefore ripe for a rebound.

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Analysts at TD Securities see 1.2228 as an important watershed level below which they would adopt a bearish outlook and expect a move down to “test panic lows” established in the week before.

Presumably above that level and TD are relatively bullish, although they are not quoted as citing any upside targets.

CitiFX say the pair should only be sold on a larger relief rally:

"GBP/USD spiked to a 1.2327 high (a more than 2 big figure jump from the 1.2090 low) on reports that UK PM May will allow parliament to vote on her plan on Brexit though once it is realised that the vote is not on the trigger itself but more to do with negotiating tactics, not surprisingly, the initial enthusiasm to cover cable shorts meets heavy sellers and it’s tough to see how GBP can make any real, medium term gains in the current environment.

"Nevertheless, with volatility high (an exception to the low volumes in the FX space overall) and sterling sentiment being more headline driven than fundamentals, moves can be fairly large either way and would therefore recommend looking for better levels to sell around 1.2600-20 in GBPUSD."