- The British pound shows signs of failure near 1.34 as interest rate expectations favor the US dollar.
- Price action suggests a potential grind lower unless a decisive breakout triggers broad-based dollar weakness.
The British pound initially tried to rally, but it failed a bit during the trading session on Friday. Ultimately, this is a market that continues to ask a lot of questions about the 1.34 level as a potential barrier and perhaps even a ceiling.
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This is a market that is trying to figure out what to do with the idea of the Federal Reserve potentially being on hold next year, while the British are most certainly going to be cutting rates soon. A lot of what happens from here comes down to the reality that the interest rate differential will not have changed, and that has a lot to do with how this pair behaves.
It was somewhat odd that the pair sold the US dollar the way it did, because this is a market that looks to be in the process of retesting the previous selloff to see whether or not downward pressure continues. That does appear to be the case.
Key Levels and Downside Risk
If the market breaks down below the 50-day EMA and the 200-day EMA, there is a real chance of a much more significant breakdown. All things being equal, this looks more like a grind lower rather than an explosive move, although that possibility always exists.
On the other hand, if the market were to break above the 1.3450 level, this area on the chart opens the door to a strong move higher. That would align with a scenario in which the US dollar sells off broadly. It is important to pay close attention to that because when the dollar sells off, it typically does so against everything at the same time.
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