The British Pound is in a secular down trend against the US dollar that should not end until the exchange rate retests the 1.035 historical low marked in 1985 and possibly moves lower to reach parity. The rate is bearish on all time scales from the daily to the 2-year duration and a bearish cycle is also now propagating from the shorter durations to the quarterly time scale. It is therefore a good idea to accompany the trend down by selling GBPUSD short on any bounce for a minimum target of 1.18 from presently 1.26.
Historical GBP/USD Exchange Rate
Mike Todd made a great job reconstructing the historical exchange rate between the Pound Sterling and the US Dollar since 1915. It may no be obvious for everyone that the rate reached a peak above 5 in 1938 and has been declining since then to reach a low of 1.035 in 1985.
The last major rate decrease occurred from 2.45 in 1985 before bouncing in what appears to be a three-wave move lasting 22 years to reach 2.12 in 2007. Finally the on-going downtrend since 2007 also appears to subdivide in at least three waves and which should drive the rate lower for a retest of the historical 1.035 low and possibly to make a new All-Time-Low (ATL) closer to parity before any serious trend reversal could ever be envisioned.
1915 to 2016 British Pound to US Dollar Exchange Rate
Recent GBP/USD Rate History since 1974
Technically, the longer term always prevails and to depict the recorded GBP/USD exchange rate since 1974 we are showing a 2-Year price chart. Most traders will find such a long time scale unpractical when on the contrary going with the long term market direction helps avoiding gross investment failures as highlighted in our post Don’t Sail Against The Wind.
This 2-year representation displays a major event – a bearish non-crossover between the 7- and 20-period moving averages (red circle) – following a lengthy period of ‘minimum volatility’ considering that the size of the largest candles is equivalent to the size of the volatility envelop (yellow color filling). The last rate candle to the right of the chart starts from January 2018 and will be final when 2020 ends, one and half year from now. In this time interval we expect this candle to close below the lower band and the bands to possibly diverge with the upper band reverting to the upside by the close of the time period.
Recorded British Pound to US Dollar Exchange Rate since 1974
Since the highlighted non-crossover combines with a preceding situation of minimum volatility we have there one of the most powerful technical signal with an increased probability or quasi-certainty that GBPUSD will retest its ATL and should possibly move even lower to approach parity in the years to come.
GBP/USD Rate on Shorter Time Frames
We could take any shorter time scale and observe that the trend is uniformly down such as on the quarterly price chart with another – although remote – non-crossover between the moving averages (MA) and the rate being heavily pressed down by the 7-period MA that should retain its downward trend for three more quarters at the strict minimum.
Quarterly British Pound to US Dollar Exchange Rate
Under such technical conditions the minimum quarterly target for the rate is the previous low around 1.18 although intermediary shorter term bounces (meaning they could last weeks or even months) will certainly take shape on the way down.
The Short Term is Bearish as well for the GBPUSD rate
On the short term a bearish cycle is also in progress that should induce a fractal propagation to the longer time scales in what is called a positive feedback loop whereas each event on a lower duration enacts a similar event on the longer ones.
On June 13th we highlighted a bearish crossover event on the 4-Hour time scale:
Then on June 14th the signal propagated to the 8-hour as expected:
By the June 14th close GBPUSD ended the day below 1.26 after marking a 1.2580 low (we luckily closed a short position at 1.2586), rendering a bearish propagation to the daily duration via a negative crossover between the 7- and 20-period moving averages practically unavoidable.
We will carry on surfing the trend down and now expect a decent bounce to take shape by the beginning of next week (starting on Monday 17th) to reopen a short position on GBPUSD.