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The British pound currency has had another terrible week against the US dollar as a sudden boost above the 94.70 mark in the US dollar index caused a raft of new sterling selling and sunk the GBPUSD pair to a new 2021 trading low.
This week drop under the 1.3400 level mean that the British pound is the second worst performing G10 currency this week, second only to the euro. Sterling selling appears to be Brexit related, the ongoing weight the pound can’t shift.
Brexit tensions over UK-EU trade have had a major market impact this week as well as US dollar buying. The important risk of complacency from traders had caused a pricing of sterling and that a sudden escalation in tensions would suddenly result in more losses ahead.
The UK and Europe are attempting to amend the Northern Ireland protocol in order to ease stresses. There have been several reports that the UK will suspend part of the Northern Ireland protocol and the EU has warned that there will be retaliation.
MUFG research notes that “Another December of escalated EU-UK trade uncertainty could be on the way.”. Continued weakness below the 1.3400 level will be major clue that more sterling weakness is coming.
We should also remember that the 1.3000 level is a very probably target, given the US FED may be hiking rates and the United Kingdom are not ready for a rate hike as stated during last week’s BoE meeting.
According to the ActivTrader Market Sentiment tool traders are currently very positive towards sterling, despite the massive pullback from the October highs, with some 76 percent of traders are bullish towards the GBUSD pair.
Typically, when retail traders are overly bullish mode then rallies can take hold and vice versa. If bullish sentiment drops, then the GBPUSD pair may start to stabilize and reverse. As things stand, things look bleak.
GBPUSD Short-term Technical Analysis
Looking at the four-hour time frame, the GBPUSD pair has formed a large head and shoulders pattern, following the recent drop towards the technically important 1.3400 level.
The GBPUSD pair could drop some 400 points if weakness persists under the 1.3400 support region, taking it towards the psychological 1.3000 level. A final right hand could form with minor bounces towards the 1.3500 area likely to be sold.
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GBPUSD Medium-term Technical Analysis
According to the daily time frame that the GBPUSD pair has formed an even larger head and shoulders pattern, and one that could sink the pair by some 700 points.
The pattern daily time frame clearly shows that the GBPUSD pair is technically challenged under the 1.3500 level, and as such weakness towards the 1.2800 level could be on the horizon.
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