GBP USD and Scottish independence

The Scottish independence referendum this week promises to be a pivotal, market-moving event for both equities and currencies. Aside from its obvious potential effect on the FTSE, the vote should also contribute significant additional volatility to the already-embattled British pound.

The GBP/USD pair (daily chart shown below) dropped last week to nearly a ten-month low of 1.6050, as well as a low for 2014, after an extreme plummet that gapped down below previous major support around the 1.6300 level.

The steep decline of the past two months, that signalled the potential beginnings of a new bearish trend, began in earnest after the retreat from the mid-July multi-year high of 1.7190.

After that retreat, the current two-month decline broke down below several major support levels, including 1.7000, 1.6700, 1.6500, and most recently, the noted 1.6300 level, a major historical support and resistance level. In the process of this plunge, price action also broke down swiftly below both the key 50-day and 200-day moving averages.

The 50-day moving average has recently crossed decisively below the 200-day moving average, a major bearish technical event that has not occurred since February of 2013.

After declining to the noted 1.6050 low last week, price action rebounded significantly to approach the noted 1.6300 level once again, this time as resistance. As of Tuesday, however, the currency pair has retreated substantially, unable to breakout above 1.6300.

If GBP/USD continues to trade below 1.6300, this week’s event risk could push the pair towards its next major downside support target around the key 1.6000 psychological support level, followed closely to the downside by the 1.5900 and then 1.5750 support targets.

In the event of any significant breakout above 1.6300 resistance, further major resistance to the upside resides around the 1.6500 level.