At this point, it’s probably more or less going to be a “fade the rallies” type of situation, but a big breakdown is probably going to take some time.

The British pound fell a bit on Wednesday as we continue to see the US dollar act like a wrecking ball against almost everything. Because of this, the market is more likely than not going to continue to remain very soft, thereby allowing sellers to come back into this market every time we rally. The 1.22 level is an area that should offer quite a bit of short-term resistance, as it was short-term support until Wednesday.

If we break down below the bottom of the candlestick, then it’s likely that we will continue to drop. The 1.20 level will be targeted at that point, and it’s likely that we could see a breakdown below that level as well. If we do break below the 1.20 level, then it’s likely that this market will target the 1.18 level, and then possibly even 1.16. I don’t think that’s going to be easy, but clearly, there is much more interest in owning the US dollar than there is in the British pound. The Federal Reserve continues the tight monetary policy, and it makes quite a bit of sense that we will continue to see a lot of interest in owning the greenback as the safety currency also.

The 1.24 level above is significant resistance, especially with the 50-day EMA approaching it, as we have been dropping rather significantly. Market breaking above the 50-day EMA opens up the possibility of a move to the 1.26 level, but I don’t see that happening anytime soon. It’s not that we break above the 1.26 level that I would worry about the upside. Ultimately, the 1.30 level could be the target in that scenario, but if we were to finally break above that as well, then it becomes a complete switch of the trend. That being said, it would take a lot to make that happen, and I just don’t see things changing that rapidly. That being said, pay attention to the bond market in the United States, because if we continue to see yields rise, that will continue to put downward pressure on this pair. I do think at this point, it’s probably more or less going to be a “fade the rallies” type of situation, but a big breakdown is probably going to take some time.

The noisy behavior more likely than not will continue throughout the rest of summer.

The US dollar dropped a bit on Friday as we continue to consolidate overall. The 1.39 level has offered a bit of resistance, and the 1.3850 level has offered support. This is a market that is trying to break out of the higher levels, and it will be interesting to see whether or not the greenback can continue to go higher. Ultimately, this is a market that will continue to find buyers on dips from everything I see, but we are starting to see the US dollar soften a bit from the extreme overbought condition that it had been in overall.

The 50-day EMA sits just below the 1.38 handle and is rising. I think this continues to be an area that people will be paying close attention to and could offer a certain amount of dynamic support. This is an area that has attracted a lot of attention a couple of times, it looks like the 1.40 level above is a massive barrier that is going to take some time to get above. If we can get above the 1.40 handle, then it’s likely that the market could go much higher. We had pulled back to the 61.8% and then bounced again. Because of this, one would have to think that eventually, we will continue to go higher, and the interest rate situation in America certainly does suggest that the US dollar should continue to rally.

Having said that, if the US dollar were to break down below the 1.3750 level, then it could change things, but right now it seems more likely than not we will have plenty of buyers on dips. The market has been noisy over the last couple of weeks, but that’s just a microcosm of the entire Forex world. I do believe that eventually we will go higher, but the noise is going to be quite drastic. Because of this, you will need to be cautious with your position sizing, recognizing that we will get the occasional irruption in both directions, and also should pay close attention to the 10-year note, because the interest rates in America will have a major influence on the greenback itself. The noisy behavior more likely than not will continue throughout the rest of summer.

The Mexican peso strengthened against the greenback during the trading session on Friday, as the USD/MXN pair broke below the 20.25 level. The 20 level is next, and it is offering quite a bit of support. The market breaking below the 20 level would kick off a lot of selling for the greenback, which could make a bit of sense as the interest rate differential here is one of the few places where we might see the US dollar suffer a bit in that scenario.

The Mexican peso is also sensitive to the crude oil market, which has had a nice run higher during the day. Ultimately, that could be a reason for Mexico to continue to attract inflow, but from a technical analysis standpoint, it is likely that we are going to continue to see a lot of back and forth and choppy behavior, something that is very common for this pair. After all, over the last couple of weeks, we have banged around between the 20 and the 20.50 levels, while the 50 Day EMA is grinding sideways. The 200 Day EMA is also going sideways and offering dynamic resistance.

Looking at the chart, you can see that this pair does tend to be very noisy so be very patient if you are going to be trading it. The market is likely to continue to see a lot of movement based upon the central bank differentials, as although the Federal Reserve is very hawkish at the moment, it is likely that we will continue to see higher interest rates in Mexico attract a certain amount of inflow as well. Furthermore, you need to keep an eye on risk appetite, due to the fact that the Mexican peso is correlated to Latin America, which of course is an area where people might throw money at if they feel like taking a bit of risk.

The alternate scenario of course could work out if there is a sudden “risk-off” type of attitude, which has people looking to get into the US dollar. The US dollar being a safety currency is something you should never forget about because it does make quite a bit of sense that money would go flowing into the US bond market if we do have a sudden shock to the system.