Nobody will be surprised by the news that the pound has fallen as gloomy clouds surround the UK economy. Technical indicators, however, imply that the worst may have passed, at least temporarily.
The chart's green and red bars each show one week's worth of changes in the dollar value of one pound. Three things indicate that investors may have "capitulated," that is, given up at the worst possible time and with the greatest conceivable loss. And when prices reach their lowest point, that is usually what happens.
First, in less than two weeks last month, the sterling fell from $1.14 to its all-time low of little under $1.00. For developed market currencies, which occasionally don't fluctuate as much in a year, that is excessive. Second, the pound experienced a very active buying after that drop, ending the week at roughly $1.11, or approximately 8% above its actual low. That demonstrates a resurgence in currency buying enthusiasm. Thirdly, the second-highest trade volume ever observed coincided with the whipsaw swing (white and gray bars). That implies that a lot of investors abandoned ship when the price fluctuated.
So, what happens next is the question. If the UK pound has actually reached its bottom, it may stay there for some time as volatility subsides and may even try to retest the previous low before beginning a new upward trend. Nevertheless, despite thoughts of capitulation, it's still important to watch for further positive UK economic news. Without it, the pound is unlikely to break much higher.
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