The British pound initially pulled back just a bit on Friday, but then shot higher to break above the 1.3250 level. The British pound continues to recover in general, after selling off quite drastically. What I find interesting is that originally we were trading on the idea of the interest rate differential and the central bank attitude differential between London and D.C., so with that being said, it is interesting that we are bouncing. I think most of this is probably due to a bit of a recovery in an oversold condition, and the fact that the interest rates in the United States have been dropping as of late.
That is a very interesting situation as we are taking a look at the possibility that the bond market is attempting to warn the Federal Reserve that it is possibly making an interest rate decision mistake, as traders are piling into bonds while the Federal Reserve is starting to step away. This does not tighten monetary policy, which works against the possible strengthening of the US dollar. Whether or not that will continue is a completely different question, and the fact that the CPI number came out rather hard during the Friday session was probably more or less already priced into the picture. It should be noted that although the reading was quite hot, the reality is that the inflation did drop ever so slightly from the October reading, so that does suggest that perhaps inflation could be topping out in the United States. If that is the case, we may be looking at the “transitory narrative” yet again.
At the very least, I think this market needed a bounce from the lows, and I think selling somewhere near the 1.34 level offers a nice selling opportunity at the first signs of exhaustion, which is what I am planning on doing. If we rip through that level, then it is possible that we will go through the 50-day EMA, but right now I just do not see that. I think we are simply oversold, and this bounce is necessary. With that in mind, I think that I will be sitting on my hands for the next couple of days and waiting for an opportunity to pick up “cheap US dollars.”
