GBP/USD fell for most of the Tuesday session as the “risk off” trade came back into play. This was probably less of a referendum on the British pound then it was a confirmation of US dollar bullishness. The pair has been consolidating over the last six weeks or so, and we are near the bottom which we identify as 1.55 based upon several supportive candles.
On the upside, we see the 1.572 1.58 level as resistive, and think that the market will struggle to get above it. With this being said, we could buy supportive candles down at this level in order to take advantage of the range, but would prefer to do so with a smaller position than usual. This is predicated on the fact that a lot of trouble was coming out of Europe and of course the United Kingdom is heavily exposed to that region.
As for selling from the 1.57 level, we are much more comfortable doing that as the Dollar seems to be the preferred currency at this moment in time. With all the problems going on in Europe, it’s difficult to believe that the British pound will outperform the US dollar. With foreign investors leaving the European Union in droves, there will be a little bit of a run to the United Kingdom, however one would have to think that as the economic problems continue, the United States treasury markets will become one of the favored trades again. Needless to say, with that you need to buy the US dollar.
On a daily close below the 1.5450 level, we think the support will have been broken and would be willing to get short aggressively in this market. If that level gives way, we fully suspect that the 1.5250 level gets retested again. This could lead to a bit of a meltdown if it gives way, as it was the site of serious support back in late may. Needless to say, it will more than likely be headlines out of the European Union and not the United Kingdom the push this pair down at this does in fact happen. Remember, this is a risk based currency pair, and that means that as risk appetite goes up so does cable. This of course works in inverse, so the more panic that we see out there – the more likely this pair falls.
Written by FX Empire