The British pound fell rather hard on Tuesday to slice through the 1.20 level. The market continues to show quite a bit of negativity, as we continue to see a lot of US dollar strength in general. The 1.20 level is a large, round, psychologically significant figure, and an area where we had bounced from previously. Because we have broken through it, that does suggest to me that we have further to go to the downside.
Beyond that, this is a market that has been in a downtrend for quite a while. The size of the candlestick is rather negative and large. The fact that we are closing at the bottom of the range of the candlestick does suggest that there should be a bit of follow-through, and therefore I would not be overly surprised to see this market continue lower. If it does continue to break down, the 1.18 level will more likely than not end up being a target, followed by the 1.16 level.
Any rally at this point in time looks suspicious, so I wll be looking for signs of exhaustion to start shorting. The 1.20 level is the first barrier above, but even if we were to break above there, I think the 1.22 level is an area where a lot of sellers have been involved, and therefore I think that is going to be difficult to get above. Furthermore, the 50-day EMA sits at the 1.24 handle, the market is likely to see that as a dynamic resistance. With the Federal Reserve tightening monetary policy, it does make quite a bit of sense that we will continue to see the US dollar strengthen.
The US dollar should continue to be sought after as it looks like the global economy is going to continue to slow down, making the need for US dollars much more important. The British pound itself is not necessarily a currency that I am overly worried about, but in this scenario, it’s all about owning the greenback. Ultimately, we will go much lower and I think the trend will continue. It’s also worth noting that until the Federal Reserve changes its attitude, it’s difficult to imagine that this market will do anything but correct from time to time, and not change its overall attitude anytime soon.
