The GBP/USD pair fell below the 1.63 level during the session on Tuesday, but bounce back above that level in order to form a hammer. This hammer of course suggests that there is plenty of support below, and as this area has been so supportive in the past, we believe that the markets probably going to bounce from here. A break of the top of the hammer should have this market looking for the 1.6450 area first, extending all the way to the 1.65 level. If we can get above there, we believe that this market will grind its way back to 1.67, and then eventually 1.70 or so.
Nonfarm payroll comes out on Friday, so that of course will have an influence on what happens with US dollar, which is half of this equation. With that, we believe that the market may be in the middle of some form of short covering, and that should put the market higher as traders may be nervous about going long of the US dollar in case the employment number is just as poor as we saw last month.
The shape of the candle is just about perfect, and it’s at the right spot. Because of this, I am fairly confident that a move higher is coming. However, breaking the top of the hammer is the sign that everyone who shorted this pair during the session on Tuesday is now losing money. There are few things that will make you more money than being on the other side of people who are losing it. That’s why I like the hammer so much, and this is a classic one.
This move could be rather rapid up to the 1.6450 level, but once we get to their there should be plenty of noise above. With that, I think that the market will slow down at that point, but I still believe that the British pound will continue to do fairly well against the US dollar, and even better against other currencies out there. With that, I obviously have no interest in shorting this market.