I was hesitant to jump into the GBP/CAD break in early January because of upcoming economic data. With another break of resistance, I’m taking this trade as the story still has legs and room to run!
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The underlying economic stories haven’t changed for both Canada and the U.K. in 2014. For Canada, Forex Gump highlighted 5 Reasons Why the Loonie Could Fall Further, most importantly the weakness in economic data. First it was the big loss of jobs in December and last week we saw a contraction in the manufacturing industry through the Ivey PMI number. Unfortunately, the outlook doesn’t look to turn rosy soon, and traders are speculating we will see the Bank of Canada signal a rate cut soon at their meeting this week. It think we may hear dovish rhetoric at this meeting, which could be a catalyst for further loonie weakness.
In the U.K., we just got a big upside surprise from their retail sales data, further supporting the strength in the economy and Sterling. This continued strength in economic keeps pound bull’s hopes alive that there will be a rate hike before 2016.
Given the divergence in economic strength and monetary policy, it’s a high probability we’ll see traders continue to support GBP/CAD.
Technically, we just saw a break of strong resistance around 1.8035 and rising lows ahead of the break. This is a strong indication buying is strong and that sellers are no where to be found. I’m going to go with the trend and break higher with a small position and tight stop just below the recent swing low, but a very big target. Here’s what I am going to do:
Long half position GBP/CAD at market (1.8079), stop at 1.7930, profit target at 1.9000
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 6.33:1. This is obviously a longer-term trade with that big target, and if it does go my way, I will scale into a bigger position and trail my stop as it goes higher. Stay tuned by following me on Twitter and Facebook!