The British pound went back and forth in rather choppy trading on Monday as the market continues to hug the $1.33 level. This is an area that has been supportive over the last couple of days, but I think that even if this market rallies, it will only end up being a nice selling opportunity at the first signs of exhaustion. Remember, the British pound has to deal with the potential lockdown issues and the Bank of England which remains very dovish as far as monetary policy is concerned. On the other side of the Atlantic Ocean, you have the Federal Reserve, which is more than willing to taper bond purchases going forward. Because of this, I think you have an outsized risk curve favoring the US dollar.
Any rally at this point in time will more than likely see quite a bit of resistance, perhaps near the 1.34 handle, and then again at the psychologically significant 1.35 handle. The 1.35 handle will also attract a lot of attention due to the fact that the 50-day EMA is racing towards it. The 50-day EMA has a certain amount of psychological and structural importance at times, so I think a lot of traders will be looking to short this market at signs of exhaustion.
On the other hand, if we were to break down below the Friday session, we could drive towards the 1.32 level in an accelerated move to the downside. Regardless, I think this is a market that eventually will go looking towards 1.30 handle and would not change my opinion until we get above the 1.35 handle, something that we are nowhere near doing right now. Because of this, I think it is a market that eventually will continue to see a lot of volatility, and as a result you need to look towards the interest rate differential between the two currencies to get an idea as to whether or not we are going to have quite a bit of volatility, or if we are going to have a relatively quiet session. Comparing 10-year yields for both economies makes the most sense, as I use it as a secondary indicator. Regardless, we are in a downtrend, and that is probably the most important thing to pay attention to.
