GBP/USD Monthly Technical Analysis for July 2016

The GBP/USD finished sharply lower in June at 1.3312, down 0.1169 or -8.07%. The trigger for the weakness was the U.K.’s decision to leave the European Union. Uncertainty about Brexit is expected to carry over into July so we expect to see further weakness next month.

The British Pound is set up for further weakness because of dovish comments from Bank of England governor Mark Carney. In late June, he warned that the central bank could enact further monetary easing as soon as August.

Carney said the central bank would likely need to further ease monetary policy this summer, leading some to believe the BoE would cut rates this month at its next meeting. He also hinted that other stimulus measures would be considered aside from cutting rates.

Recently Carney ruled out negative rates which means the MPC will only have two 25 basis point cuts available, considering the rate currently stands at 0.50%. This implies that the bank may prefer to introduce unconventional measures, such as expanding the quantitative easing program.

Most European officials want Britain to invoke Article 50 to redefine its relationship with the EU but leaders of the leave campaign refused to act last month. It is being predicted that the longer the U.K. waits, the worse it will be for the Sterling.

Despite attempts to prop up the Sterling late last month, it looks as if investors are finally coming to the realization that Brexit will happen, putting to rest speculation that political and economic maneuvering might prevent Parliament from following through on the vote. With Carney now talking about further easing in August, the Sterling is likely to continue to feel selling pressure. However, we could see a volatile two-sided trade if Article 50 is invoked.

Looking at the monthly chart from 1985 to present, one can see that the GBP/USD has had a history of sharp sell-offs, making the current move seem relatively mild. The 31-year range is 1.0520 to 2.1160. Its retracement zone is 1.5318 to 1.4186. Essentially, last month’s steep sell-off occurred when the market took out the Fibonacci level at 1.4186 and a long-term uptrending angle which comes in at 1.4296 this month. These two prices should be considered resistance.

Given the current downside momentum, we could see a continuation of the selling with 1.2764 the next target. This price is 15% below last month’s high and represents a target identified by some analysts. If you recall, prior to the referendum, some analysts were predicting a 10% to 15% decline if the U.K. voted to leave the European Union. We already saw the 10% break so the next key target is the 15% level. This is followed closely by another uptrending angle at 1.2414.

If economic reports start to show the U.K. economy is weakening because of Brexit and the central bank cuts rates more than 25 basis points then we could see the selling extend beyond the 1.2414 angle. If there is enough downside momentum, we could see a break into the next uptrending angle at 1.1467. This is the last potential support angle before the 1.0520 main bottom.

The downside momentum at the end of the month suggests the selling should continue into July with 1.2764 the next major target. We may see a technical bounce on the first test of this level. If there is a short-covering rally and investors are able to overcome the 1985 bottom at 1.3501, we could see a further extension of the move because this will trap bearish investors near the low and they may be forced to cover their short positions aggressively.