The British pound initially tried to rally on Friday but gave back gains as we approached the 50-day EMA. By doing so, the market looks as if it is going to test the 200-day EMA next, and I would also point out that we sold off rather rapidly later in the day. Because of this, it looks like the negativity is accelerating, as demand for US dollars in the relative safety of the bond market may be picking up.
The 200-day EMA sits just above the crucial 1.37 handle, which is an area that has been important more than once. The area kicks off a lot of support all the way down to the 1.36 handle. If we were to break down below that level, it is likely that the market could go much lower. Breaking down below the 1.36 handle would be violating a “double bottom”, which is a very negative thing to happen. At that point, I think that the market would break down significantly.
In the short term, it is likely that we are going to see sellers on exhaustion, at least until we can break above the 1.39 handle. If we did, then that would obviously be a very bullish sign, but over the long term you can see that we continue to struggle as we are slumping lower. In fact, it looks as if we are forming some type of huge topping pattern, so that would be very negative. This being the case, the market is likely to continue seeing fading of short-term rallies.
The US dollar has been a major driver of this market, and I think at this point it is more about that currency than the British pound. The market continues to be very choppy to say the least, but it is clear that the sellers have taken over at this point as fear around the world continue to be a major issue. With this, the market will continue to see an attempt to get down to the 1.36 level. But again, if we break down below there, I think that this market has further to go.
