- The GBP/USD rallied just a bit during the trading session on Tuesday as we continued to meander just below the $1.20 level.
- This is an area that obviously would have a certain amount of psychology attached to it, but it’s also an area that had been imported previously.
- The market has quite aggressively recovered from the massive selloff that previously had been part of the dip to the sub-1.05 level.
Keep in mind that the major selloff had to do with a budget that was proposed by the previous PM, who of course has left office. Since then, we have seen the British pound pick up about 10 handles, which of course is a very strong move. However, we have not broken the downtrend and the downtrend is there for a reason. Quite frankly, the British economy looks as if it’s going to have a very difficult winter ahead of it, as even the Bank of England has stated that they are expecting a two-year recession.
Liquidity Could be an Issue
It is very possible that the Forex markets are going to stop focusing so much on interest rates and focus more on economic growth. In that environment, we still favor the US dollar since the United States economy may be entering a recession, but it is not expected to be an extraordinarily deep one. Even if it were, the rest of the world would almost certainly enter a steep recession, and therefore it makes owning dollars even more attractive. In other words, it could be a “risk off” play.
As we are between the 200-Day EMA and the 50-Day EMA indicators, I would expect a lot of volatility. Typically, when this happens, you will see a move in one direction or the other that is a bit of a squeeze. In the meantime, I think a lot of traders are also focusing on the fact that it’s a relatively short trading week in North America, so that will have some influence as well. With this, liquidity could be an issue, so keep an eye on that as well.
On a break above the 1.21 level, then I think the British pound really starts to take off again. On the other hand, if we break down below the 50-Day EMA we should continue to reaffirm the negative trend.
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