GBP/USD has risen against the US dollar as traders starting to bet that the worst of the crisis in Great Britain is over. The pound had been a punching bag, but things are starting to stabilize. Whether or not things are going to change is a completely different situation, but in the short term it looks like a lot of the panic is finally over. The 1.15 level has a lot of psychology attached to it, as it is a large, round, psychologically significant figure, and is also an area where we had seen a lot of noise previously, so if we see a pullback that would not be a huge surprise.
The British pound will continue to have to fight against the US dollar, as the Federal Reserve continues to tighten monetary policy, but at this point it looks like “hopium” is in full swing. That being said, it’s going to take very to spook the market, and therefore I’d be very cautious about going long what had been an absolutely brutal selloff. Underneath, the 1.10 level should be a major support level, and I think is the bottom of the overall consolidation area. The 1.10 level being broken to the downside would be the beginning of something rather ugly, perhaps opening up the British pound for a move down to the 1.05 level.
I still believe that the British pound could very well end up down at the parity level sometime this winter, but in the short term it looks like the oversold condition is trying to be fought against.Whether or not we have enough momentum to keep that up is a completely different question, but at this point I think it’s obvious that the 50-Day EMA is starting to cause a little bit of noise right along with that previous support level.In general I think we’ve got a situation where as soon as we see signs of exhaustion, there will probably be people willing to short this market in order to buy US dollars.
Even if we do break out from here, I’m not overly impressed until we can break above the 1.20 level on a daily close. That would be another 500 pips, and in this type of market environment, that type of volatility is not out of the question.