The British pound initially tried to rally on Friday but fell rather significantly to wipe out the candlestick from the previous session. This is a bit telling, because most of the gains from the British pound on Thursday were due to the fact that the Bank of England did a surprise rate hike. Normally, something like that will stick and you will see a little bit of a follow-through.
While we did see a rally initially, and quite a violent one at that, we gave back about half the gains during the session. Friday was just simply a continuation of that beat down that the British pound got the day before. The fact that a central bank raising rates cannot pick this pair off the floor tells you most of what you need to know. We are most decidedly in a downtrend, and that has not changed. Quite frankly, this is an extraordinarily negative sign, due to the fact that it was the best possible outcome for the pound, and it was turned right back around. Because of this, it is very likely that we will continue to drift lower, perhaps reaching towards the crucial 1.32 handle.
Any move below the 1.32 level would open up significant selling, perhaps sending the British pound down to the 1.30 level, which is my longer-term target. To the upside, if we were to break out above the 1.34 handle, that would wipe out my analysis completely and send this market much higher. This does not necessarily seem like a likely outcome, but it is something that could happen based upon a certain amount of probability. Nonetheless, the US dollar does look like it is strengthening against most currencies, so this is not just the British pound situation. As long as that is going to be the case, then it makes quite a bit of sense that sterling will simply follow other currency pairs as the greenback rules supreme. The Federal Reserve is supposedly going to raise interest rates something like six times in the next two years, which is much more aggressive than any of the other central banks around the world. For what it is worth, I do not believe that will actually happen, but right now that is what everybody is trying to price in.
