The British pound initially tried to rally on Monday but then started to drift a bit lower. This is not a huge surprise, because we had formed quite a bit of resistance over the last couple of days near the 1.37 handle, and we did end up forming a bit of a shooting star during the trading session on Thursday last week. That being said, this is a market that had recently broken out of the channel, so what I am waiting to see is whether or not there will be buyers underneath.
Ultimately, we need to pay close attention to how this market behaves when it gets close to the channel that it broke out of and whether or not that downtrend line that was at the top of it ends up forming a bit of support. What is going to be very interesting is the fact that the 200 day EMA sits there as well, so I think this is an area where we could see a big signal as to whether or not we can continue to go higher. The 200 day EMA is quite often watched by algorithms and longer-term traders, so this of course is worth paying close attention to.
I would not read too much into the Monday session, simply due to the fact that it was also the Martin Luther King Jr. holiday in the United States, so it makes sense that volume was light. Furthermore, the market had gotten a bit overextended, so this pullback is probably something that is necessary. That being said, if we break down below the 1.35 handle, then we would obviously see a complete meltdown at that point. I suspect that if you saw the market break down like that, you would probably also see the US dollar dominating everything else as well, so it is more or less a situation where unless we get sudden US dollar strength against everything, this is a market that will probably continue to go higher, especially considering that the British pound has a significant amount of strength as of late, even when the US dollar did strengthen a bit against other currencies. Currency traders seem to be pricing in the idea of the United Kingdom exiting the coronavirus economy quicker than many others.
