The British pound initially had a push to the upside on Tuesday but gave back gains underneath the 1.28 level. At that point, the market then fell significantly to reach the 1.26 handle as the Bank of England suggested that it was not going to bring down its balance sheet anytime soon. This has had a massive effect on the British pound itself as we have seen a collapse of 400 points in the last three days.
Furthermore, the United States continues to see interest rates climb, and of course, the Federal Reserve is looking very likely to see plenty of reasons to raise interest rates as inflation is getting out of control. Because of this, I think it is probably only a matter of time before we see the US dollar overtake the British pound even more aggressively, as hard as that may be to believe. At this point, the market seems to be pricing in something akin to Armageddon, and it’s accelerating.
I think we are going to go looking to reach the 1.25 level underneath, which is a large, round, psychologically significant figure and an area where a certain amount of profit-taking will probably come into the picture. I do think that given enough time we will see a huge standoff and perhaps even a major bounce. However, those bounces will more than likely offer selling opportunities at the first signs of exhaustion. As far as the British pound is concerned, we would need to see it clear the 1.30 level on a daily close to even remotely look close to getting long at this point. The 50-day EMA is at the 1.3131 level and dropping, and I think would cause a bit of resistance as well if we get that high.
If we do break down below the 1.25 level, it is very likely that we will see a massive selloff at that point as well, perhaps accelerating to the downside. If that were to happen, you would probably see the US dollar attacking almost everything in the markets, and it would be a foregone conclusion that the British pound would not be any different. This would be a major “risk-off” type of situation, which we are rapidly approaching and is looking more and more likely.
