GBPUSD could extend drop ahead of UK election

Last week saw the GBP/USD drop sharply as the stay above 1.30 proved to be short-lived, as we had long expected. The drop does not necessarily point to a trend change, but it does show market participants are edgy ahead of the UK general election next week. With some key short-term support levels broken, the cable may weaken further in the coming days, especially if this week’s US economic pointers surprise to the upside.

As can be seen from the weekly chart, the cable broke cleanly below short-term support at 1.2865-90 area last week. At the start of this week, the GBP/USD is testing this broken area and there is a good possibility that this zone could turn into resistance and mark the weekly high.

Traders may now wish to watch the lower time frames for the potential emergence of any bearish setups around this area.

In the event that the GBP/USD turns lower here, the next key support to watch is the prior resistance around 1.2775. But with this level having turned into support a couple of times already, the third test could lead to a potential breakdown. If so, this may then pave the way for a drop to the next key support around 1.2575-1.2615, this area being the point of origin of the last breakout.

However, if the 1.2865-90 area does not turn into resistance then the bearish idea would have to be put on hold. This does would necessarily mean the bullish trend has resumed, as it could be a false break.

But if and when the GBP/USD creates a new high above resistance at 1.3000 and last week’s peak at 1.3045 then all bets would be off for the bears. In this potential scenario, the GBP/USD’s next objectives would be around 1.3240 and then 1.3345.

So, to recap, the GBP/USD is offering two alternative setups on its weekly time frame. Given last week’s breakdown and upcoming UK elections next week, we prefer the bearish setup over the bullish at this stage.