The British pound bounced quite nicely from the 200-day EMA on Wednesday. This also coincided with a move back down to the previous downtrend line of the channel that should now offer support, and it certainly looks as if we are trying to do so. In fact, if you look at the last 48 hours and try to make a “two-day candle” out of them, you could make an argument for a bit of a hammer. This is a perfect pullback that should continue to show signs of bullish pressure.
The Bank of England is anticipating to raise interest rates in the short term, unlike some of its G10 compatriots. The United States is likely to raise interest rates as well, but the United Kingdom also is stepping away from the coronavirus economy, as several restrictions have been lifted. Because of this, I do believe that the British pound will continue to find buyers and the fact that we are sitting on top of the 200 day EMA also attracts a lot of longer-term traders. Whether or not we can hold is a completely different question, but if we can break above the highs of the day for the trading session on Wednesday, then I think we will go looking towards the highs again, which is essentially the 1.37 level.
If we do break down underneath from here, then the market clearing the 200 day EMA could open up the possibility of a move down to the 1.35 handle, which of course is a large, round, psychologically significant figure and the 50 day EMA. Breaking below that would make the entire move above the downtrend line a bit of a “throw over”, or what some people call a “false breakout.” Either way, it would be very negative, and I think this market would probably break down quite a bit. At that point, I would anticipate a move down to the 1.32 level, but I do not see that happening unless the US dollar suddenly strengthens against everything at the same time. That is not impossible, but it is worth noting that even when the US dollar has strengthened, the British pound has been a bit of an outlier. I do not see anything on this chart to suggest that it will continue to be.
