The British pound has broken significantly during the trading session on Monday, as there was more or less a “risk off attitude” around the world. We crashed through the 200 day EMA, which in and of itself is a very negative turn of events. Because of this, I think that certain people are looking to push this market through the 1.36 handle, which is an area where we had formed a little bit of a “double bottom” previously. Crashing through that opens up the possibility of a move down to the 1.35 handle, and perhaps even lower than that.
If we were to have that happen, I think the US dollar will strengthen quite radically, as there will be a lot of people running towards the bond market. Quite frankly, the British pound has been hanging on by a thread for a while, and as a result it is very likely that we would continue to see massive amounts of volatility in choppiness. Nonetheless, I think it is obvious that we have something going on out there when it comes to risk appetite, with the world worrying about the Chinese credit situation more than anything else. While this does not necessarily mean that the British pound itself should be shunned, when measured against the US dollar is a completely different conversation. I do believe at this point in time the greenback is about to have its day.
When I look at this chart, if we break down below the 1.36 handle, it is very likely that the 1.35 handle could cause a little bit of noise, but I would not be surprised at all to see this market drop even further, perhaps attacking the 1.32 level on its way down to the 1.30 handle. Furthermore, I think that if we start to see a huge “risk off move”, you will see the same behavior in multiple currency pairs, so I think at this point in time rallies will be sold into, and it is not until we break above the 1.39 handle, then I would change my mind, but right now we seem to be light years away from that. Rallies at this point that show signs of exhaustion are to be sold into, as the trend is most certainly starting to slump even lower.
