Pay attention to the interest rates, because the differential will continue to be a major factor in where we go next.
The British pound fell hard on Friday but then turned around to show signs of life again. We ended up forming a hammer, which is a bullish sign, but we still are well below significant previous support. With this in mind, I think we will get a little bit of a bounce, followed by some selling pressure. It will be very interesting to see what happens at the 1.34 handle, which is a significant area of shorting.
As far as buying is concerned, I would need to see the market break above the 50-day EMA, or maybe even above the 1.36 level, in order to get long for a bigger move. It is worth noting that the US dollar has been overbought for a while, so it certainly seems that this bounce is probably necessary. The market will probably continue to see a lot of choppy behavior as we try to figure out whether we are “risk on” or are starting to become “risk off.” Recently, a lot of what we have been seeing is a differential between the Bank of England and the Federal Reserve, at least as far as purchasing of bonds is concerned. The Federal Reserve has been tapering, while the Bank of England seems to be nowhere near it.
If we were to break down below the bottom of the candlestick for the trading session, then it is likely that we could break down and go looking towards the 1.30 handle which has been my longer-term target. Nonetheless, markets do not go in one direction forever, so a bit of a bounce should make quite a bit of sense. That being said though, if we break above the 1.36 handle, then it is likely that we could go to the 1.38 handle, maybe even the 1.40 handle. We would obviously need to see some type of fundamental shift at that point, perhaps more of a dovish scenario in the United States. At this point though, it is obvious that the US economy is one of the better performers, so it makes sense that eventually money will go flowing to the greenback. Pay attention to the interest rates, because the differential will continue to be a major factor in where we go next.