Last week our bearish stance targeted initial weakness for the GBP/USD at 1.6330. Ultimately, this region stood no chance as recent polls have provided a major shift with Yes votes (secession from UK) taking over the No votes.
Scotland will hold an independence referendum on September 18th and now it appears the decision can go either way. Uncertainty may drive pound a lower in the run up to the vote.
The party for an independent Scotland has run on the idea of keeping sterling as their currency as part of a currency union with the U.K, but the government of Prime Minister David Cameron has ruled out sharing the pound with an independent Scotland.
Despite a strengthening rebound in the UK economy, this uncertainty will delay rate hikes and put the pound possibly under pressure until price gets closer to the 1.60 handle. If the Yes votes win, we may see another slide towards 1.5750. If the No votes, a modest rebound may occur that we may look to fade around the 1.6500 area.
The other half of the trade focuses on the U.S. economy and the argument for a stronger U.S. dollar is still supported by the path that appears to be firmly in place by the Fed. The employment situation is improving despite last Friday’s miss, which many are expecting to be positively revised. The expectations for QE to be over with is October and a rate hike may happen next summer.
GBP/USD stabilized this morning at 1.6100 as the selloff appears to have exhausted itself. Currently on the daily chart, you can see that since the breakdown below the key 1.70 level and 3 Simple Moving Averages, the bearish bias has firmly been in place. If we see short covering or a new poll suggesting a shift back to staying back in the UK, we may see price rally towards the 1.6250 level.
The trade: Sell GBP/USD at 1.6250 with a stop loss at 1.6300 and a take profit at 1.6050. The Risk/Reward Ratio is 1:4.
Edward J. Moya