What To Know
- GBP/USD remains capped by resistance between 1.3650 and 1.3750.
- A breakout above 1.3750 could open the way for further gains in the British pound.
- A GBP/USD pullback could target support near 1.3550.
- USD/JPY continues to grind higher after finding support near 158 yen.
- The U.S.-Japan interest rate differential continues to support USD/JPY and the carry trade.
The macro backdrop right now of the markets is one that has a lot of focus on the Federal Reserve and whether or not they will be able to raise rates and, for that matter, there are a lot of concerns about the geopolitics coming out of the Middle East.
For example, we've recently seen a lack of headlines, and that does have people a little bit more optimistic, but it is a bit of a quagmire. Determining what happens next has been at best a guessing game, and it's played havoc with potential inflation. With that, the currency markets, of course, are moving on those expectations, and as a result, we've seen some pretty erratic moves.
Resistance Zone for GBP/USD
The British pound continues to struggle near the 1.3650 level. This is an area that's been important more than once, going back to May of last year, and it looks like the same thing happened in May of this year, with hesitation being the key.
There's a zone of resistance between here and the 1.3750 level that I think will continue to be very difficult to break above, but if we can get above there, then the British pound could take off.
Keep in mind, Friday has Kevin Warsh, the Federal Reserve chairman, speaking, and maybe that's the catalyst. We'll just have to wait and see. Otherwise, a pullback to the 1.3550 level makes a certain amount of sense.
USD/JPY
The US dollar continues to grind higher against the Japanese yen, and the key word here is grind. It's been a bit of a slog fest as of late, bouncing from the crucial 158 yen level, the trend line, the 200-day EMA, but being tucked away firmly below the 50-day EMA at the 160 yen level.
Carry Trade and Interest Rate Differential
This is a pair that pays you to just sit there and collect swap at the end of every day. That's what I've been doing for months, despite the fact that there have been a couple of interventions.
The reality is, buyers are still looking at the interest rate differential and taking advantage of it. The Japanese are very unlikely to be able to tighten, and even if they do, it will be insignificant in comparison to many other currencies, providing a little bit of a floor here.
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