The British pound initially rallied on Wednesday to break above the 1.35 handle, only to give up the gains after the Federal Reserve reiterated its interest in raising interest rates through the rest of the year. At this point, it is very likely that the market is going to try to break down below the bottom of the last couple of candlesticks, which would be a very negative turn of events.
If we were to break down below there, then the market is going to test the 1.34 handle, and then perhaps even down to the 1.32 level. At this point, the market has been a bit overdone in the short term, but it is likely to continue seeing plenty of noisy behavior. It is going to confirm the “false breakout narrative” that I had been talking about over the last couple of days. After all, we had broken above the top of the downtrend line only to give up those gains, and now it looks to me like the market is going to continue to press to the downside.
If we did turn around, it is not until we break out well above the 200 day EMA that I would consider buying, and I would also need to see a bit of US dollar selling across the board in order to do so. The British pound had been one of the outliers when it comes to currencies against the greenback, so it may fall a little slowly in comparison to some others, but it is likely that we would see this market drift lower regardless. You may get a little bit more alpha shorting other currencies such as the Australian dollar in comparison, but I do believe that the trade to the downside will still work if we get a breakdown through that little micro support level. I think that the US dollar will continue to strengthen, so you have to keep it in the back of your mind and understand that this is a scenario where a little bit of patience probably goes a long way. Position size accordingly, but recognize that the sellers are starting to become a little more aggressive.
