GBP/USD had a back and forth session on Monday as traders first bought it up, and then sold it off. The main reason was the fact that the meeting in Europe between Sarkozy and Merkel produced what was called a framework for fiscal union, and a new treaty for the EU. The afternoon in America saw the S&P ratings agency put 15 of the countries in the EU on “Credit Watch Negative”, and this deflated the gains that the Euro saw.
The Pound lost ground simply because of the fact that the two economies are so intertwined. The UK sends 30% of its exports to the EU, and this will impact the GDP of the UK in a strong way if the EU falls into recession, or has a meltdown. The EU is also where a lot of UK banks have their cash parked. The banks in the UK are knee-deep in the mess on the continent.
The GBP/US is also a “risk on” trade, and the Dollar got a bid in the afternoon all around. The resulting candle is a shooting star and the top is sitting right at the 1.57 handle. This shows that perhaps we are seeing more pressure to the downside in this pair as the bounce has just been sold. The 1.55 level underneath is support, and that support runs all the way down to the 1.53 level.
With all of this in mind, we are selling rallies in cable. The breaking below the lowest levels from the Monday session will send more sellers into the market, and should see at least the 1.55 level. The bearishness could continue down to 1.53, but that level has acted as extremely tough support. The breaking below that level would send this pair much lower, and would without a doubt have us looking for 1.50 before it is all said and done.
We won’t buy the pair as there are simply far too many risks involved in selling the safest of all currencies right now, the US dollar. Because of this, we are very patient and willing to wait until the Pound rises in order to keep buying Dollars.