At this point, I am looking for signs of exhaustion after rallies to start shorting.
The British pound rallied a bit on Wednesday to give a little bit of a relief rally in this market. The 1.31 level has offered support, but now as the market approaches the 1.32 handle, it is probably going to struggle a little bit, and I do believe that it is only a matter of time before the sellers come back in. After all, this is a market that has been very negative for a long time, and perhaps even got overdone recently. This bounce is the result of falling too quickly.
The size of the candlestick is of no consequence, considering just how negative things had gotten during the previous sessions. In fact, it is not until we break above the 1.34 level that I would be truly impressed by any rally because the British pound is suffering at the hands of the fact that it is not the US dollar. The Federal Reserve is going to have a meeting next week and whether they sound hawkish or dovish with the statement will be the determining factor in where we go against the greenback, not only in sterling but many other currencies around the world.
While the Bank of England was somewhat hawkish, the reality is that the United Kingdom might be quicker to ease than the Federal Reserve will be. Everything is a mess, and the Federal Reserve has a significant conundrum on its hands because we not only have inflation, but we also have a global slowdown. This is the dreaded stagflation that people have been warning about for years that seems to finally be here. This is when growth is depleted, but at the same time, you see a lot of inflation. The Federal Reserve will probably be forced to tighten monetary policy, thereby making the US dollar even stronger.
At this point, I am looking for signs of exhaustion after rallies to start shorting. A long way to the upside is a signal for me to start shorting because I think at this point we are more likely than not trying to get to the 1.30 handle over the long run. The 1.30 level of course is a major round figure that will attract a lot of attention so I would expect to see a big battle at that point.