During Monday's trading session, the British pound rallied, suggesting that the market is going to try to break above the 1.20 level again. However, this level is a large, round, psychologically significant figure, so it's not surprising that the market continues to struggle with this idea. Additionally, the 1.21 level features the 50-Day EMA and the 200-Day EMA indicators, which many traders pay close attention to, making the market very noisy and putting a short-term ceiling on any potential rally. It's more likely that any rally at this point in time will be sold into at the first signs of exhaustion.
GBP/USD Current Trading Scenario
- On the other hand, if the market breaks down below the hammer from last week, it's likely that it could go looking to the 1.18 level, an area that was supported previously and where the market launched from to enter the consolidation area that it had been in for a while.
- Breaking below that level could be like a trapdoor opening, allowing the British pound to fall quite drastically.
- This scenario makes sense, given that the US dollar continues to strengthen across the board, and there is no reason to think that the British pound will be any different.
While the Bank of England has had to deal with a lot of inflation recently, and monetary policy may remain tight longer than anticipated, traders should also consider the same attitude towards the Federal Reserve. It's becoming clear that the Federal Reserve is going to remain "tighter for longer", as inflation is not going anywhere in the United States. There is currently high demand for US dollars as interest rates around the world continue to climb, and world governments have to pay back US dollar-denominated debt.
The outlook for the British pound is bearish, and traders should be cautious when considering long positions. The market continues to struggle with the significant 1.20 level, and the 50-Day EMA and the 200-Day EMA indicators at the 1.21 level make the market very noisy. Traders should look to fade rallies at the first signs of exhaustion and breaking below the 1.18 level could result in a significant drop in the British pound. Additionally, the ongoing strength of the US dollar and the Federal Reserve's commitment to tighter monetary policy means that traders should expect continued downward pressure on the British pound in the near future.
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