Pound-Dollar Breaks Brexit Trendline as 2016 Low Fades From View

The pound’s biggest advance in two decades on Tuesday helped the currency break out of its downtrend line drawn from the Brexit vote day, confirming a more lasting bottom is now in place, technical patterns suggest.

Bulls emboldened by the 3.1 percent jump - which was driven by investors covering short positions and U.K. Prime Minister Theresa May providing clarity on her Brexit plans -- will keep their eyes peeled on interim resistance at 1.2556, the 100-day moving average and then 1.2798, the pound’s low in July against the dollar.

If the pound manages to break above those levels, it could attempt an approach toward 1.3450, near the highs in July and September.

Whether or not the currency finds that momentum, Tuesday’s rally reinforces the notion that the ‘flash crash’ low of 1.1841 seen in October could become a distant memory, and a level that is not expected to be revisited for some time. On the other hand, a close below Jan. 16’s low of 1.1986 could question the renewed upside prospects.

Leveraged investors, as a community, still short on the pound at more than one standard deviation below the 90- and 180-day-average readings, according to a CFTC report dated Jan. 10. Overall speculative net positioning shows that sterling shorts outweigh longs by about 29 percent as a percentage of open interest. That suggests that there is potential for more short-covering.

• NOTE: Sejul Gokal is a technical strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice