The market will now have to make up its mind as to where it wants to go longer term.
The British pound fell significantly on Friday as we have sliced through the 1.30 handle. However, we started to see the market turn around quite significantly later in the day, as the British pound bounced from this obvious source of support. The question now is whether or not it can extend?
This is an area in which a lot of people have been looking for the British pound to recover, so I would not be surprised at all to see a little bit of a bounce. However, at this point in time, I think it is probably only a matter of time before the sellers would return, as we have been in such a strong downtrend. The 1.32 level is going to be significant resistance, especially now that the 50-day EMA is racing towards it. I think at this point it will be a “fade the rally” type of situation ahead.
On the other hand, if the market were to break down below the bottom of the candlestick for the Friday session, then it is possible that we could go looking towards the 1.29 level, possibly even the 1.28 level which is the bottom of a short-term consolidation area just below the 1.30 handle.
In general, the British pound is going to continue to suffer at the hands of risk appetite destruction across the world, as the US dollar is considered to be the first place people run toward if there is a lot of concern. That being said, if we do get a short-term rally, the first signs of exhaustion would be a signal for me to start selling. The market will continue to be very noisy, but at this juncture, I think that we are going to have to pay close attention to the bond markets in general. Ultimately, this is a market that is going to have to decide whether or not it is forming a “double bottom”, or if it is just simply a bounce on the way much lower. A little bit of patience will probably go a long way in this market, as you can see just how choppy it has been over the last couple of weeks. The market will now have to make up its mind as to where it wants to go longer term.