(Bloomberg) -- The pound has managed to hold above psychological support at $1.20 this month even with heightened Brexit uncertainty, yet charts suggest the market may be getting ready for another stab at the level.
At a time when the risk of a no-deal split with the European Union and global trade tensions weigh on sterling by fueling a sell-on-rallies bias, technical analysis is boosting the case for traders to sell downside breaks. The U.K. currency formed a bearish candle pattern on Friday, the so-called Downside Tasuki Gap, which signals the continuation of the current downtrend.
The pattern is completed when the first bar extends a downtrend, the second gaps lower while the third closes higher yet within the gap of the two bars. Weekly bearish candle patterns are historically associated with fresh cycle lows and can therefore be seen as a good proxy for the currency’s short-to-medium term direction. Sterling dropped a second day Tuesday, slips as much as 0.4% to $1.2083.
The pound touched $1.2015 on Aug. 12, the lowest level since early 2017. Should U.K. currency break below $1.20, it could head toward the low of $1.1841 hit during the October 2016 flash crash.
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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