The inability of the Tory Party to secure a parliamentary majority spurred a sharp decline in sterling. It helped complete a topping pattern that we had been tracking. Sterling had recovered smartly since dipping below $1.20 in mid-January. The rally stalled in front of $1.3055, which is the 38.2% retracement of the losses suffered since the UK referendum a year ago. More recently, it has appreciated this month ahead of election. It reached the high while the British peop le were going to the polls on June 8 near $1.2980.
Sterling carved a potential head and shoulders topping pattern. The left shoulder was shaped in the first half of May and topped before reaching $1.30. The head was the push in the second half of May to almost $1.3050. The right shoulder was formed in the past two weeks. The neck line appears to be around $1.2760. The measuring objective is in the $1.2450 area. On Bloomberg, which has the October low of $1.1840 (other services record a lower low), the 50% retracement of the rally since is $1.2445.
From another perspective, sterling initially held the 38.2% retracement of this year’s rally. That retracement is found near $1.2640. The 50% retracement is about $1.2520 and the 61.8% retracement a little below $1.24. The RSI and MACDs favor additional losses, while the Slow Stochastics are lagging. Of course, such a dramatic move has pushed sterling well below its lower Bollinger Band (~$1.2775), which is where its bounce after the low was recorded stalled. It should offer initial resistance. The high since the first exit poll-inspired drop was almost $1.2830.
The Dollar Index moved higher for the last three sessions. It is the longest streak in a month. The Dollar Index held the lows seen last November below 96.00. It finished the week above its 20-day moving average for the first time since peaking on May 11. Initial resistance is seen near 97.75-97.80. A move above there would likely coincide with the crossing of the five and 20-day moving averages. The recovery can run toward 98.60 before more difficult questions about the medium-term outlook may be raised.
