- The British pound has fallen another 0.6% during the trading session on Friday, as the US dollar continues to act as a wrecking ball against almost everything.
- The market is likely to continue to see noisy behavior, but I think short-term rallies are probably the best way to get involved in this market, especially at the first signs of exhaustion.
- The fact that we broke down below the 1.15 level of course is a very negative sign, as the psychology of that big figure is important.
The US dollar has been very strong for a while, as the Federal Reserve is going to continue to tighten monetary policy. I do believe that eventually, we will see something break, and that will probably cause even more bullish momentum with the greenback. Any rally now will probably look at the 1.15 level as previous support that is going to be resistance. Ultimately, signs of exhaustion get sold into, and I just do not have a situation where I’m willing to start buying the GBP/USD.
Monetary Policy Likely to Hinder the Pound
The Federal Reserve is going to continue to be aggressive with its monetary policy, just as the Bank of England is stuck between a rock and a hard place. It’s very difficult to imagine a scenario where the British pound suddenly becomes attractive, especially as the economy of the United Kingdom is almost certainly going to go into recession. Everybody is shorting US dollars because most debts around the world are based on that very same currency. Suddenly, everybody is trying to tighten their belts, meaning that we will continue to see greenback strength. Furthermore, interest rates continue to climb, and of course, the Federal Reserve is probably going to over-tighten.
The 50-Day EMA sits at roughly 1.18 level and is dropping. Ultimately, this is a market that would look at that indicator as something important because it has been rather reliable over the last several months. My target at this point is the 1.1250 level, which may be reached rather quickly based on the momentum picking up the way it has. With this, I believe the market remains negative for the foreseeable future, as there’s just no reason to short the US dollar right now. Remember that next week the Federal Reserve has an interest rate hike coming.
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