Pound weakness has been a big theme in the markets these days, thanks to resurfacing concerns about the Brexit. Here’s why I jumped in this GBP/NZD short trade.
GBP/NZD Trade Idea
On the pair’s 4-hour time frame, it can be seen that price is starting to break below the descending triangle support around the 1.7750 minor psychological level. I was able to short at market for a small risk at 1.7605 and I’ve placed my stop past the triangle resistance and that 1.8000 area of interest.
I’m bearish on the pound because the currency pretty much shrugged off the stronger than expected U.K. manufacturing PMI reading yesterday, which goes to show that traders doubt that the economy can keep up its strong performance as the Brexit draws closer. Over the weekend, Prime Minister Theresa May confirmed that they are likely to invoke Article 50 by the first quarter of next year, also suggesting that the U.K. isn’t afraid to leave the single market.
This could increase the pressure on the BOE to act, possibly by lowering interest rates again or pumping up their bond purchases. While the RBNZ has also signaled its intention to cut again, I think that this scenario has already been priced in a long while back and traders might continue to buy up the commodity currency because of its positive carry.
Besides, we’ve got New Zealand’s Global Dairy Trade auction coming up soon and another gain in prices could mean a strong boost for the Kiwi, perhaps even lowering the odds of another RBNZ cut. After all, the industry has been showing a lot of positive momentum in the latest auctions, although the pace of price increases has been slowing.
I’ve jumped in a small nibbler position at market (1.7605) for 0.25% risk but I plan on adding on either a pullback to the broken triangle support at 1.7750 or on a continuation of the bearish move. I’ve got a wide stop at 1.8025 for now, which should give me room to add to my position, and I’ll be aiming for at least a thousand pips in gains or the same height as the triangle pattern.
As always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.