- The GBP/USD currency pair initially tried to rally Monday but gave back the gains rather quickly.
- By doing so, it suggests that the market is going to test the 1.20 level underneath, which is a large, round, psychologically significant number that a lot of people will have to pay close attention to. It is also an area that has seen support previously, so if we were to break down through it, that could kick off even more selling pressure.
UK Recession Likely to Cause Noise
If we were to break down below the 1.20 level, the market is likely to go down to the 1.18 level. The 1.18 level has offered a significant amount of support, so breaking down below there opens up the bottom for the British pound. On the other hand, the market could turn around and try to take out the 1.22 handle. If it does, that would be a very bullish sign, perhaps opening up a move to the 1.23 level. All things being equal, this is a market that I think is going to continue to be noisy, due to the fact that the Bank of England has just stated that the United Kingdom is almost certainly going to head into recession. That is not good obviously, and ironically, so is the United States.
That being said, the market is likely to continue to see a lot of demand for US dollars, especially if they start to jump into the bond market in order to protect trade accounts in what is a very rough economic situation. Ultimately, I think that rallies will continue to be sold into, so it’s difficult to get bullish anytime soon. In fact, it’s not until we break above the 1.26 level that I would think we could get beyond in order to change the trend. If we were to change the trend, then the market could go all the way to the 1.30 level.
The only thing that I think you can count on here is going to be a lot of volatility, but that’s nothing new. With that being said, the market is likely to be one in which you need to pay close attention to short-term moves, but still favor the downside overall as the US dollar is by far the strongest currency in the world.
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