Why We Are Making A Bullish Call On GBP/USD

Now that PM Theresa May has announced stepping down from the Conservative Party leadership as of June 7, the ongoing political chaos will shift temporarily from striking a deal on the Withdrawal Agreement to reaching a winner in the Party leadership race. We know former Foreign Minister Boris Johnson is considered as the favorite to become PM with 9:4 odds. We also know too well he’s a staunch Brexit supporter. I do not foresee him as the next Prime Minister. So what’s this chart telling us below?

Cable H And S May 24 2019

If the inverted head-&-shoulders formation above is correct, then it suggests that we will no longer see a weekly close in GBP/USD below 1.2600. Perhaps an intra-week drop to 1.2580 or 1.2550 but not a Friday close under 1.2600. I continue to expect 1.3700 or 1.3800 before end of Q3. This includes a move of +400 pips in a single trading week within the next 3 weeks. After a series of winning trades in cable, we were unfortunate earlier this week to have been stopped out at 1.2630 in our cable longs. Keeping a clear head on the price, chart and fundamental considerations at hand is what counts to survive in this market.

For the record: We’re not basing our bullish GBP/USD call solely on the inverted H&S formation. There are other factors such as USD considerations, macro dynamics, spreads, positioning, and speculative sentiment.

Fundamentally, a rally in the cable could occur via several routes: Due to Boris Johnson’s staunch pro-Brexit stance and his relative indifference to a no-deal outcome, any emerging news negatively affecting his PM candidacy will be GBP-positive. An alternative Johnson scenario (GBP-positive) would be for him to secure a Brexit deal. Any path towards that would be a positive shock to the pound. There are various other options, not all of which are related to the leadership race. But the 3 major outcomes remain well on the table: Brexit with a deal, Brexit with no deal or a new general election and possibly the 4th outcome that of a second referendum. And keep an eye on Sunday’s EU elections results. A strong showing for the LibDems or a surprise +20% would be favorable for sterling bulls.

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