British pound trying to form a bottom
The British pound has formed a hammer for the weekly candle stick last week, and as we look at the longer-term charts, there are some things that are starting to stand out. Initially, the most obvious thing is that the 1.25 level is offering support, as the number obviously is a large, round, psychologically significant figure. These are the places where large money flows in and out of the currency markets.
The most glaring thing on this chart is that the MACD is rising, while price is starting to stabilize after falling. This of course is a major sign, as we see these types of divergence just before trend changes quite often. What this in mind, the divergence will be confirmed if we can break above the top of the hammer from the previous week, because at that point it will show several sellers being trapped at these low levels.
If we do break above there, then the next resistance area is at the 1.2750 level above. That of course is an area that has featured resistance over the last couple of months, so it will more than likely cause several issues. However, if we were to break above there it’s likely that the market could open up to reach towards the 1.30 level.
The alternate scenario
The alternate scenario is one that we should also always keep in the back of our mind. If we were to break down below the bottom of the hammer, that would of course be a very negative sign, breaking through a significant amount of support. By doing so, the market could drop down to the 1.2250 level, perhaps even the 1.20 level after that. That being said, this would probably have more to do with the Brexit than anything else, or perhaps the Federal Reserve disappointing.
Remember, the Federal Reserve is expected to cut rates in the month of July, and if they don’t that could suddenly have a positive effect on the greenback. While the Brexit is always an issue, the reality is that people pay far more attention to the Federal Reserve most of the time. However, don’t forget that a sudden headline coming out of London could switch focus right away.
The play going forward
Trading this market is relatively simple if you choose to make it: you simply need to look at the hammer as a bit of a binary signal. In other words, if we were to break down below the bottom of the hammer, then you should be a seller of this market. However, if we were to break above the top of it then it’s likely that we will bounce to at least the 1.2750 level, perhaps even the 1.30 level.
This is all about the greenback currently, so if the Federal Reserve sounds extraordinarily dovish, that could give the British pound a bit of a bounce as a result. Whether or not it’s a longer-term uptrend is a completely different question, but at this point it does look like we are trying to form some type a bottom here. This can be seen across the Forex world as the US dollar starting to lose some of its luster.