The British pound rallied rather significantly on Monday to turn around and bounce above the 1.3550 level. Looking at this chart, it appears that we are going to reach towards the 50-day EMA above, which is currently just below the 1.37 handle. The market had previously been below the 1.35 handle, but the fact that we have recovered the way we had in the last 48 hours, it does suggest that we are going to continue seeing plenty of upward momentum. In fact, you can make a real argument that we just formed a “double bottom.”
It is because of this that if we were to break below the double bottom, which is substantively the 1.34 handle, then the market could go much lower. At that point, I would consider the uptrend in the British pound over, and it would be very likely that we would go much lower, perhaps reaching towards the 1.30 handle. With that in mind, I think that I would become aggressively short in that scenario. This would be especially true if we see the US dollar strengthening overall.
If we were to turn around and break above the 50-day EMA, then it would more than likely open up the 1.38 handle, possibly even a bigger move than that. The US dollar is suffering at the hands of lower interest rates, so it does make sense that we would see the US dollar continue to fall. The Bank of England had recently failed to taper, but at the end of the day it seems to be a more or less a short-term situation, and they are more likely going to taper in the future. Because of this, the market will continue to see a bit of a repricing of the British pound. That was probably more or less an overreaction, so I think what we have is a potential buying opportunity. Regardless, I think you will probably see a lot of volatility, but eventually we will get some directional clarity. Remember, when the trend starts to change, it is quite often very noisy, just as we are seeing right now. When you look at the longer-term charts, we have been in an uptrend for quite a while, with the exception of the last couple of months.