The GBP/USD pair fell during the session on Thursday, and even broke below the 1.52 level which was the launching area of the ascending triangle last summer that sent this market all the way up to the 1.63 handle. However, by the end of the session we solid turnaround and a hammer print for the day. The fact that we printed a hammer where we did does suggest that there is a significant amount of support in this general vicinity. Because of this, I fully anticipate a break of the Thursday highs to be a nice buy signal for the British pound.
The market is oversold lately, and as a result I think this could be a bit of a short-term trade. The real questions will be asked of the 1.55 handle however, and as a result if I do buy this market, I fully expect to be out of it by the time we reach that level. Make no bones about it; this is a countertrend trade, something that isn't optimal.
Quantitative easing?
This is a battle of two central banks that are looking to do more quantitative easing. The fact is that the Federal Reserve will win this battle sooner or later, and the British pound will continue to climb against the US dollar. However, it should be noted that there are fears of the United Kingdom going back into recession, so that could be something we see down the road and not anytime soon.
Point forward, I like selling rallies but believe that a move above the 1.58 level would signal the ascension of the Pound in its relative performance against other currencies. In the meantime, I think that rallies will offer selling opportunities, but the next 200 pips make certainly go towards the buyers.
Alternately, if we managed to break the bottom of the hammer, this would be a very bearish sign and should send the British pound into a tailspin at that point. If that happens, I would completely expect to reach the 1.50 level in almost no time.