The British pound broke down significantly on Tuesday to reach down towards the 200-day EMA near the 1.3580 level. The market is currently testing not only the 200 day EMA, but also the previous downtrend line from the overall negative channel that we had been in. Because of this, I believe that the market probably has a significant amount of buying pressure in this area. Whether or not it holds is a completely different question, but at this point in time it looks as if there is a big fight on our hands.
One of the biggest drivers of this move during the day is the fact that interest rates in the United States are spiking, so it does make sense that we would see noisy trading in this area. I think that the market will probably see a lot of back and forth and fighting, and you could get hurt here if you are not careful. With this in mind, you are probably going to be better off waiting to see how this plays out over the next couple of sessions, whether or not we break down or if we get some type of nice bounce. I believe at this point, it all comes down to the 10-year note, which has been sold off quite drastically and continues to have the United States offer more attractive interest rates. That of course is a major driver of Forex pairs, although the reality is that the last 13 years has been a bit of an outlier as the Federal Reserve has distorted the market so much. Now that they are perhaps looking towards the real economy for once, this has caused complete havoc for Wall Street and large traders.
The market will of course be noisy, but if we were to break down below the 1.35 handle, I think that is it for the British pound and we will go looking towards 1.32, and probably lower than that. The question at this point was always going to be “was this the false breakout, or are we ready to continue going higher?”
