I believe that fading short-term rallies will be the best way to trade this market as there are far too many fundamental reasons for the British pound to continue falling.
The British pound did very little on Friday as we continue to pay close attention to the 1.25 handle. The 1.25 level is a large, round, psychologically significant figure, and an area where you would anticipate a certain amount of interest. It is worth noting that it is also where the flag from the bullish flag pattern sits, so it does make sense that we would see some market memory in this area come to light.
If we can break down below the lows of the Friday session, is likely that we will go down to the lows of the last couple of days, which is basically the 1.2325 level. If we break down below there, we would more likely than not see an acceleration to the downside, and perhaps the British pound drop all the way down to the 1.22 handle.
On the other hand, if we were to break above the 1.25 handle, then the market could rise toward the 1.26 level, where I would expect to see a lot of resistance as well. We have been in a downtrend for quite some time, but we also are a bit oversold, so I would wait to see some signs of exhaustion that you can start fading. The 50-day EMA sits at the 1.2750 level and is dropping. Because of this, I would anticipate a certain amount of dynamic resistance, especially as the trend has been so reliable. After that, then we have the 1.30 handle, which is a large, round, psychologically significant figure and an area where we had seen support previously. That area should now have a certain amount of “market memory” attached to it, meaning that there should be plenty of sellers.
The Federal Reserve remains very tight with its monetary policy, and the US dollar should continue to be a major beneficiary. The interest rate differential continues to scream in the direction of the US dollar, so that also helps. Unless the Federal Reserve changes its tune, it is difficult to imagine a scenario where this market rallies for anything more than a short-term trade. Currently, I believe that fading short-term rallies will be the best way to trade this market as there are far too many fundamental reasons for the British pound to continue falling.