The British pound fell again on Tuesday as we broke down significantly below the 1.34 handle. While we have bounced just a bit during the end of the session, the reality is that it is only a matter of time before we see more selling pressure. Any bounce at this point in time will be looked at through the prism of a short-term rally that people will be willing to jump on. Ultimately, any signs of exhaustion will be an opportunity to start shorting from what I can see, at least not until we can break above significant resistance in the form of the 50-day EMA, currently hanging about the 1.36 level.
We have been drifting lower for a while, and as a result it is likely that the overall momentum will continue to push this market lower. If we can break down below the bottom of the candlestick from on Tuesday, then it opens up the possibility to reach down towards the 1.30 level, which is the longer-term target. We have recently seen a “death cross” as the 50-day EMA has broken down below the 200-day EMA. That is a longer-term negative signal and should send this market much lower.
If we did manage to break above the 200-day EMA, that would obviously change the overall attitude, but at this point that seems to be very unlikely. The market will continue to see rallies as an opportunity to pick up “cheap dollars”, as the US Dollar Index has broken out significantly. That shows itself not only here but in other currencies as well. With that being the case, I do not want to short the greenback regardless. If the market were to turn around and show signs of strength in this pair, I would probably look for an opportunity to buy the British pound against other currencies because it would probably turn out much better in general. The most recent bounce has been shorter than the one before it, so that continues to show signs of a downtrend accelerating going forward. The Bank of England is very dovish, while the Federal Reserve is starting to taper the bond purchase program and therefore starting to tighten monetary policy.
