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British Pound: 2 Years of History in 1 Chart

Plus, trend implications going into 2017

by Vadim Pokhlebkin
Updated: December 09, 2016

This was the year of political surprises.

First was the shocking Brexit vote in June. Then, the surprise Donald Trump victory in November. Both of those moments saw a lot of volatility in the financial markets. Yet, while it's tempting to say "of course" and blame it on the news, the reality is not so black-and-white.

Case in point: the British pound. Or sterling, or GBPUSD -- or cable, as it's known to forex traders.

After Britain's June 23 vote to leave the European Union, cable fell off a cliff. It was its biggest decline in 30 years. But was the Brexit vote to blame?

Below, you see a chart of GBPUSD going back to 2014. Why two years? Because cable's bearish trend didn't start on June 23 of this year. Yes, it accelerated that day, but the larger trend had been unfolding for months prior.

To help you make sense of this chart, below it you'll find excerpts from the analysis our Chief Currency Strategist, Jim Martens, posted for our Currency Pro Service and Global Market Perspective subscribers in real time going back to April 2014.

On the chart, you see the date and summary of each forecast. (Click to enlarge.)


April 2014: Up into a major top.

"Cable might push above 1.7043 before it completes its countertrend rally from 2009... a reversal is near."

July 2014: Topping.

"Cable pushed above 1.7043, but as noted last month, the advance from 1.3502 is vulnerable to complete retracement. ...cable's advance is near an end."

October 2014: Much lower.

"The big picture in GBPUSD remains quite bearish, at minimum eclipsing the early 2009 low near 1.3502."

January 2015: Short-term bullish.

"The decline from July is nearing an end.... watch carefully for evidence a bottom and a turn higher."

February 2015: Short-term bullish.

"The recovery from 1.4951 is arguably in five waves, which suggests a bottom... the recovery could prove much larger, lasting months."

July 2015: Another top.

"...corrective recovery is complete and cable has turned lower. The long-term view calls for substantially lower price levels."

August 2015: Below $1.35.

"Wave (3) down should easily exceed the 2009 low near 1.35.'" 

September 2015: Sharply lower.

"Cable looks sharply lower. A decline of that magnitude is unlikely to take place in isolation, and supports our other generally bullish US dollar outlooks."

February 2016: Short-term bullish.

"Cable reached a low of 1.4081 before staging what should prove to be a corrective recovery."

June 2016: Down hard.

"Regardless of the outcome of the Brexit vote, the Wave Principle favors sterling weakness relative to the U.S. dollar."

July 2016: Down hard.

"Brexit got the mainstream credit, but readers know that the bearish wave count in place for months saw the collapse coming. The decline should continue to the 1.16 area..."

August 2016: Pause.

"Sideways trade since the post-Brexit slump likely represents a pause before GBPUSD continues its slide."

October 2016: Decline resuming.

"Allowing for additional consolidation in wave 4, the 5th wave should reach below 1.2797. We've previously cited targets in the 1.16 -- 1.18 area." 

November 2016: Long-term targets met.

"The media attributed the plunge to a 'hard Brexit,' but it was the anticipated thrust from a triangle. The 1.1949 low lies just above our longstanding target area from 1.16 to 1.18, although prices varied by data provider, with quotes as low as 1.10. It is possible to label wave (3) complete at the October low."

If there is one forecast that stands out from this line-up, it's this one:

June 2016: Down hard.

"Regardless of the outcome of the Brexit vote, the Wave Principle favors sterling weakness relative to the U.S. dollar."

Our Chief Currency Strategist, Jim Martens, posted this forecast on June 3, three weeks before the British vote. Someone could ask,

"So, wait -- if Elliott waves were pointing 'down hard' for the pound well before the vote, does that mean that the waves were predicting Brexit?"

The answer is, no. This question implies a very traditional view of the financial markets: Prices move up when the news is good, and down when the news is bad. But Jim's forecast said, "regardless." No matter which way the vote went, cable's trend was headed down.

How come?

Collective psychology. That's what drives market trends, not the news. Elliott wave patterns in price charts track the changes in the psychology as it moves the market up or down, with or without news. The two-year history of price action in cable is just another example.

So, where does this leave cable now? Notice the last line in the last forecast above: "It is possible to label wave (3) complete at the October low." If so, cable should enjoy some strength going into 2017.

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British Pound: 2 Years of History in 1 Chart