- The GBP/USD experienced an initial surge during Thursday's trading session but is already exhibiting signs of reluctance.
- This market has arguably been excessively bearish, and a short-term reversal wouldn't be surprising.
- However, considering the challenging circumstances in the United Kingdom and the anticipated severe recession in the European Union this winter, a long-term decline in the British pound seems plausible.
The Bank of England maintains a lenient stance, contrasting with the Federal Reserve's stringent monetary policy. This divergence is likely to drive the market towards the 1.20 level, a substantial and psychologically impactful figure. A breach below this level could pave the way for a further decline to the 1.1850 level. Any rallies are expected to encounter resistance at the 1.2350 level, a historically significant area. The market is poised to continue its downward trajectory, and a breakthrough above the resistance could alter the market dynamics. Currently, the market is on the brink of experiencing the "death cross," a technical indicator where the 50-day EMA falls below the 200-day EMA, signaling a prolonged downtrend.
Looking to Short the Market
Ultimately, the British pound is a currency that I think it has a lot of headwinds, and I just don’t see how those changes anytime soon. Nonetheless, this is also a market that has a lot of exterior pressure, not the least of which would be the questions going on in the European Union, which of course is completely out of the control of the MPC at the Bank of England. The British economy seems to be slowing down, so that in and of itself could cause some issues for the British pound as well.
On the other side of the Atlantic, you have the Federal Reserve which looks to stay “tighter for longer”, and that of course has a very detrimental effect on currencies measured against the US dollar as the US dollar will strengthen due to those higher rates. Because of this, I think we’ve got a situation where traders will have to look at this through the prism of finding “cheap US dollars” and shorting this market every time it shows signs of exhaustion after a short-term rally. Longer-term, it’s very likely that we go looking to that 1.1850 level, but it may take some time to get there as the overextension of the selling pressure may find it a bit difficult to continue in one direction for the short term.
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