I believe we will continue to see more of a “fade the rally” type situation in this pair.
The British pound initially tried to rally on Monday, but could not hang on to the gains. Because of this, it looks as if the British pound is ready to go lower, which does make sense considering just how hawkish the Federal Reserve is as of late. The Fed has already promised to raise interest rates another 100 basis points, and some are even thinking it may be closer to 150 basis points.
On the other hand, the Bank of England, although sounding more hawkish, is nowhere near raising rates to that effect. Because of this, the interest rate differential alone will continue to drive the US dollar higher. Furthermore, there are concerns about recession around the world, and that typically causes a shortage in US dollars. There are trillions of dollars worth of debt around the world right now that need to be repaid in greenbacks, so the demand is extraordinary.
When I look at this chart, the most interesting trait for me will be to fade rallies as they occur and show signs of hesitation. Monday was another example of such potential trading, albeit on a short timeframe and during a holiday schedule. Speaking of the holiday, it was Independence Day in the United States, and with none of the banks in New York putting a lot of money to work, the US dollar still managed to fight off an attempt to sell it off by the Europeans. This says quite a bit about the future direction of this market, and I believe we will continue to see more of a “fade the rally” type situation in this pair.
We would have to break above the 50-day EMA at the 1.24 level to begin to think about going higher, and even then I would not be convinced until we broke above the 1.26 level. I suspect that it is much more likely that we go to the 1.18 level before all of that happens, as it looks like we are going to do everything we can to break this market back down. The 1.20 level of course has attracted a lot of psychological support, but whether or not it holds is a completely different argument altogether. I do think that eventually it gets broken through and we drop further.