The British pound started to dip slightly on Wednesday but turned around to show signs of strength. At this point, the market has broken above the top of the inverted hammer/shooting star from the last couple of days, which is a very bullish sign. That being said, there is still a significant amount of resistance above extending all the way to the 1.36 handle. That is an area where we had seen the most recent selloff, so it will be interesting to see what happens next going forward. That being said, this is a market that will continue to see a lot of noisy behavior and I think what we have here is a situation where the British pound looks good, but it also needs to prove itself.
To the downside, the 1.34 level has offered significant support, so breaking back down below there would be a very strong turn of events, but we will have to wait to see whether or not that happens. More likely than not, we will probably see signs of exhaustion above just waiting to get involved to the downside. If we do break above the 1.36 handle, that could be a major change in attitude. Pay close attention to the yield differences between the United States and the United Kingdom, as tapering in the bond market purchase program could be one of the main reasons why the US dollar continues to strengthen. The Bank of England has been very dovish, so that has had a major influence on what we are seeing here as well. In the short term, it looks like we might get a little bit of a recovery, but it is still a market that is very much in a downtrend and that is something that cannot be ignored. If we do break down below the lows again, then it is likely that we could see this market go looking towards the 1.30 handle, but that is a longer-term call more than anything else. It is also worth noting that the US Dollar Index has broken out quite significantly, but might be a little extended, so a pullback against the greenback for the next couple of days might make a little bit of sense.
