GBP/USD Sitting on Support Heading into Friday Session
The British pound has rallied slightly on Thursday, showing some sense of resiliency. The question now is going to be what we do on Friday, because, quite frankly, this is a major point of inflection for this pair, and possibly the market on the whole. It'll be interesting to see whether or not the buyers are willing to step in and support Sterling after what has been a fairly brutal sell-off. This is an area that could decide a lot of things shortly.
The overall picture in the GBP/USD pair is one of consolidation with a lot of downward pressure, so now the question is, will the US dollar strength override the resiliency of the pound sterling, or is this going to be a potential buying opportunity? It's likely that the market remains very hesitant to get aggressive here, but some type of external factor could come into the picture and tip the scales. For example, headlines between the US and Iran could potentially interrupt any movement as traders could react based on what they want to do with the USD.
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Pro-USD Behavior Still Intact. For Now.
The recent market behavior has been one of very pro-US dollar and essentially anti-everything else. That being said, the British pound itself isn't necessarily a weak currency; it's more about the United States' strength in economic fashion and, of course, the US dollar itself. It seems as if there is quite a bit of momentum into the United States dollar, not just here but everywhere else. That is having a bit of a knock-on effect here, as although the GBP has been relatively strong in comparison to others, the reality is that the US dollar remains the biggest winner recently.
In this environment of uncertainty, and the possibility that the US economy will continue to do better than most others, the US dollar will more likely than not be sought out by traders, but a sudden “risk on” move could derail things for a short bit.
The consensus is that there could be as many as 3 interest rate hikes coming out of the Federal Reserve. That could be a bit of a stretch because, quite frankly, at the same time, the bond markets are hinting that perhaps inflation is starting to get under control. There will be a serious tug-of-war here, and it's going to be based around the US dollar more than the British pound. That's why I think there's a certain amount of risk in this area in both directions. What we need to see is some type of impulsive candlestick to show a real shift in sentiment at the moment. These areas can make the next month’s move a bit clearer, but volume and momentum are needed.
One thing that would change the overall outlook for this pair is if we got an explosive red candlestick for the day, showing quite a bit of US dollar strength. At that point, we could see an acceleration in US dollar strength not only here but in other multiple currency pairs. It's worth knowing that the 50-day EMA is in the process of crossing below the 200-day EMA, kicking off the so-called death cross. While not necessarily the most reliable indicator, it is one that gets a lot of attention.
Alternatively, if this pair were to break above the 1.33 level, that would show extreme resiliency, and we would probably see the US dollar sell off against other currencies or, at the very least, see the British pound strengthen across the board.
Friday Close Could be Important
At this point, watching the Friday close and the momentum break in one direction or the other will be the play, and it is worth saying that if you believe in the British pound, this might be a good place to get involved. After all, the US dollar is a little stretched against multiple other currencies, so you may see a short-term reprieve as we head into the uncertainty of the week. Unfortunately, this is a volatile time, and I don’t think that goes away.
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