British Pound Attempts to Recover

The US dollar will probably continue to strengthen.

The British pound initially slid against the US dollar Friday but has recovered quite nicely as you can see on the chart. The resulting candle is a hammer, suggesting that we may see a bit of a bounce in the short term. That being said, I would consider this more or less a relief rally than anything else. I suspect that the 1.22 level offers a bit of resistance above, as it has been both support and resistance recently, suggesting that there should be a significant amount of “market memory” in that area.

• While the market may rally for the next day or two, I will be looking for signs of weakness that I can start shorting again.
• I do not believe that this is the end of the trend, just that we had gotten a bit overdone.
• The 50-day EMA sits at the 1.2350 level and is sloping lower, offering a significant amount of dynamic resistance that we will have to pay close attention to.

If we were to break above there, then it’s likely that we could see even more momentum to reach the 1.26 level. At that point, you have to start to take a trend reversal as being a real threat.

Breaking Down from Last Week

The size of the candlestick is not overly impressive, because this is essentially a market that’s just hanging around the 1.20 level. If we were to break down below the lows of the week, that opens up fresh selling, but quite frankly I think a bounce is healthy because it gives you an opportunity to pick up “cheap US dollars.” Remember, you are looking at a relative value play here, so the US dollar is the desired currency, but if you can get it at a better price that’s always what you want to do.

It will break down below the lows last week, then I think we start to focus on the 1.18 level, and then eventually the 1.15 level where I would anticipate another big fight. We are at relatively low extremes at the moment, but this is a market that has to deal with rising interest rates in America, recessionary concerns around the world, and quite frankly just a lot of general angst, meaning that the US dollar will probably continue to strengthen.