The British pound rallied a bit on Tuesday but gave back gain to show signs of hesitation yet again. This is a market that will continue to see a lot of noisy behavior and pay close attention to the 1.22 level. This is an area that has been noisy multiple times, so I think it makes sense that we will continue to see traders fade rallies when they occur. I think the US dollar will continue to be the currency that most people want, as we are more likely than not going to be heading into a recession.
The interest rate situation in America continues to go higher, so I think it makes quite a bit of sense that we would see the US dollar climb. The market has been very noisy all the way down, so I think at this point any time that we have a rally you have to look at it with suspicion, especially as the 50-day EMA is slipping below the 1.26 level and heading even lower. Ultimately, I think that anytime we see a rally, there will be plenty of people willing to jump in and get short.
If we were to break above the 1.24 level, then it’s possible that we could go looking to reach the 1.26 handle. The 1.26 level is an area where we have seen a lot of selling pressure in the past, so it would make a lot of sense to see “market memory” come into the picture. In that scenario, you should more likely than not see trouble come back into the picture, and the US dollar will continue to be attractive. Ultimately, if we break down below the 1.22 handle, then it’s very possible that we will challenge the 1.20 level again. In fact, that’s my base case scenario because I do believe that the downward pressure will continue to be a mainstay of this market, especially as interest rates rise in the United States, and of course, there are a lot of people will be paying close attention to it and taking advantage of greenback strength. Ultimately, the British pound also has to worry about the fact that it is so highly levered to the European Union, so that’s something to pay attention to as well.
