There are only a few days left to one of the most interesting and confusing elections in history…
The market is bracing itself for a “no clear majority winner” in the UK elections.
This could mean absolute uncertainty and a potential financial and political storm.
The one currency I am watching right now is the British Pound (GBPUSD) which is starting to show some worrying signs.
The British Pound had a good month in April. The pulse signal sent GBPUSD flying 500 points up from its average of 1.50 to its peak just under 1.55.
But it is too early to call a change in trend in the British Pound… There are signs that the budding uptrend could now be in trouble.
On Friday the GBPUSD broke down below its rising uptrend line (see dotted red line on the chart) and the pulse is now beginning to lose momentum.
What is also worrying is that the selling was accompanied with above average volume (see above chart). This is not a good sign…
When I see a correction in price in an uptrend, I like to see below average volume on the downward moves. This tells us that there is little conviction in the selling and that the uptrend will likely continue.
However, above average volume on selling tells us that there is strength of conviction in the selling, and that we could see further lower prices. This is precisely what we are seeing right now in GBPUSD.
Worries about the outcome of the UK election on Thursday and weeks of potential uncertainty may well be a catalyst for this bearish move.
There are now 2 things we need to keep an eye on:
1) Key levels on the British Pound:
If the pound can maintain itself above key support at the 1.50 level and the 21 moving average (blue line on the chart), there is still a chance that this uptrend could continue.
However, if the pound closes below the 21 moving average and the key 1.50 level, bears could take control and push GBPUSD lower towards 1.46. If this situation arises, rallies to resistance (such as the 21 EMA) are shorting opportunities.
2) Relationship with the US Dollar:
The British Pound has a strong inverse correlation with the US Dollar. This should not be forgotten since local issues with the election are really not the main factors driving the pound.
The recent weakness in the US Dollar has helped the strength in GBPUSD. Take a look at this chart:
The US Dollar is currently resting on key support just above 94. If the dollar holds this level and rallies from here, this will put downward pressure on the British Pound.
This would make sense since I believe there is still one more push higher left in the US dollar before we see this major uptrend come to an end.
If the US Dollar were were to move above 97, this could signal a reversal and a continuation of its upward trend, which would further weaken the pound.
Alessio Rastani is a stock market trader at www.leadingtrader.com