By: Christopher Lewis

GBP/USD has been on an absolute tear recently. The move has been parabolic by just about any definition, and the Federal Reserve promising ultra low interest rates until at least the end of 2014 has done nothing to get in the way. It is against this backdrop that I find myself asking some questions about cable at the moment.

The British economy is going to get sucker punched by the European one as the Brits send 40% of their exports to the EU. The EU is going into recession, so it would stand that the biggest customer of the British is suddenly going to be buying much less. This certainly cannot be good for the outlook of the British economy, and a GDP number last week was actually negative. Because of this, the Pound isn’t exactly the currency I want to own currently.

However, the ability of the Federal Reserve to kill the value of the US dollar should never be underestimated. The promise to keep rates low for such a long period of time has the effect of weakening the Dollar, and the thought is that it makes American goods cheaper for the rest of the world to buy. (Never mind the rising commodity prices though.)

Support and Resistance

The chart is at an interesting place currently. The rise has been parabolic as I mentioned before, and to be honest – quite impressive. The pair has seen all of the recent selloffs reversed over the last couple of weeks, and the Monday session was no different. In fact, the 1.57 level held as support, and it formed a hammer.

This hammer can be one of two things, and you don’t know which one until after the move unfortunately. The breaking of the top of the hammer is a bullish sign, but the 1.58 level being so close would have me waiting for a daily close above the big figure at 1.58 in order to go long. This would show a real break of resistance. However, on the downside, if we close below the bottom of the range, the candle becomes a “hanging man”, which is very bearish.

With all of this in mind, I am watching this pair for one of the two scenarios listed above. If we close above 1.58, I am long. If we close below the lows on Monday, I am selling and aiming for the next supportive area I see – the 1.55 handle.