Pound Pressures USD on Potential Breakout

It is obvious to me that traders right now do not believe the Federal Reserve.

The British pound initially fell on Friday to reach down towards the 1.31 level before turning around and reaching towards the 1.32 handle. This is an area that I think should continue to be significant resistance, so if we break above there it would be a very strong sign. Ultimately, this is a market that I think could open up for a move towards the 1.34 handle, or perhaps even the 50-day EMA.

Looking at the shape of the candlestick, it is suggesting that we are going to try to break out to the upside, but that does not necessarily mean anything until it actually happens. After all, it is interesting that we were willing to hang on to the pound going into the weekend. That might be a good sign, and that could open up the possibility of a much bigger move.

If we break down below the bottom of the candlestick for the Friday session, that is likely that we could go looking towards the 1.30 handle underneath, as it is an area that I think would attract a lot of attention. What is worth noting is that there are several markets out there right now that suggest perhaps the Federal Reserve will not be able to tighten, and that might be part of what we are seeing across the board. Whether or not they can is a completely different question, but it is obvious to me that traders right now do not believe the Federal Reserve.

Whether or not they choose to fight inflation will be the question, because some governors are talking about 50 basis point interest rate hikes, while others are happy with 25 bps. Nonetheless, it will be interesting to see how this plays out because the markets are showing so much in the way of hesitation to believe the Fed. If they do convince the market that they are going to get tight again, it will be interesting to see how it plays out. However, it is interesting that now that we have an idea of what the Fed is going to do, the market seems to be somewhat okay with it. Ultimately, it will be interesting to see what happens next, but the most obvious part of the analysis is that the 1.32 level matters.


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