GBP/USD Monthly Technical Analysis for May 2016

The GBP/USD closed higher in April at 1.4605, up 0.0246 or +1.71%. Traders said that the easing of concerns about a U.K. exit from the European Union helped bolster prices.

A recent poll published in the Financial Times showed that 43% of respondents would vote for remaining in the European Union, 41% would vote for leaving the EU, and 16% were undecided. The poll suggests that the percentage of citizens who want to remain in the European Union (HEDJ) is a little higher than those who want to leave the EU.

The key economic news this month will be released on May 12. They include the BOE Inflation report, MPC Official Bank Rate Votes and the Monetary Policy Summary.

On May 17 the latest consumer inflation data will be released. This will be followed on May 18 by the latest U.K. labor figures. The Second Estimate of GDP will be released on May 26.

Although the latest polls show that most Brits favor remaining a member of the European Union, the Bank of England has started preparing contingency plans for Britain to leave the EU, with staff across its financial stability, monetary policy and regulatory wings ready to calm any turmoil.

In the days leading up to the June 23 poll, the Bank will hold additional auctions of sterling to ensure the banking system has sufficient funds to operate in a potentially chaotic moment.

Three exceptional auctions of cash have already been planned for June 14, 21 and 28. But stuffing the banks full of cash will not prevent foreigners and UK households and companies from dumping sterling in the event of a Brexit vote.

Michael Saunders, the new member of the bank’s Monetary Policy Committee, expects the British Pound to come under severe pressure. While still at Citi, he wrote that Brexit risks were “nowhere near priced yet”, adding that Britain should expect a 15 to 20 percent depreciation of Sterling against Britain’s main trading partners.

If such a decision to flee sterling leads British banks to become short of foreign currency, the BoE will rapidly offer foreign currency loans to the financial system, using swap lines with other central banks still in existence from the financial crisis.

Technically, the main trend is down according to the monthly swing chart.

The main range is 1.5929 to 1.3835. Its retracement zone at 1.4882 to 1.5129 is the primary upside target this month. Since the main trend is down, sellers may show up on a test of this zone to defend the downtrend.

The market closed at 1.4605 in April. This put the market on the strong side of a steep uptrending angle. However, this angle moves up to 1.4795 in May. The market will have to overtake this angle in order to regain the upside momentum it had at the end of the month.

Overtaking 1.4795 will put the GBP/USD in a bullish position with the next target a 50% level at 1.4882. This is followed by a downtrending angle at 1.5049 and a Fibonacci level at 1.5129.

The inability to overtake 1.4795 will indicate that the buying is not that strong and perhaps last month’s rally was fueled by short-covering rather than aggressive buying.

If sellers decide to come back into the market then look for a pullback into the next major angle at 1.4315. This is followed by another uptrending angle at 1.4075.

If the short-covering continues this month then look for buyers to go after 1.4795. Trader reaction to this angle will determine whether the current rally is setting up a new shorting opportunity or if real buyers are coming in.