The British pound pulled back a bit on Monday after initially gapping higher. We have tested the 1.35 handle, which is a large, round, psychologically significant figure. The 50-day EMA sitting there offers a bit of support as well, so I do think that it is probably only a matter of time before the buyers at least try to save this market, something that we started to see late in the session.
However, if we break down below the 50 day EMA and the lows of the day on Monday, it is possible that we could go down to the 1.34 handle after that. The 1.34 handle underneath has seen both support and resistance there, so it makes sense that we have bounced from there. If we were to break through that level, then we will continue to go much lower, perhaps testing the lows again. Keep in mind that the British pound has been boosted by the Bank of England sounding much more hawkish and raising rates. That being said, the Federal Reserve is expected to raise rates much more aggressively than the Bank of England, so it will be interesting to see how this plays out. Furthermore, you have to keep in mind that there is a certain amount of concern around the world, and that could have people running for cover.
When you look at the chart, you can see that we are chopping around and forming a little bit of noisy behavior, but if we were to break out above the highs of the last couple of sessions, it is likely that the market could go looking towards 1.37 handle, and a break above those highs in that general vicinity could have opened up the possibility of a much bigger move. That being said, you have to pay close attention to the risk appetite of other market such as the stock market and commodities to get an idea as to whether or not we rise or fall in this pair. The worse that those markets do, the more likely you are to see a lot of US dollar rallies in general. I do think that you have to cut your position size to about half of normal times.
