I don’t know if it’s overdone, but I’m looking to play the bullish dollar sentiment that’s dominated lately, with the help of U.K. data this week.
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My Pick of the Week is a the usual attempt to enter a longer-term trend trade, this time on the GBP/USD downtrend that’s been going on since July. I’m bullish the Greenback because the FOMC is ending quantitative easing, and speculation of a potential rate hike from the Fed next year (which is hotly debated at the moment). Given the weakening global economic data as of late, who knows if or when that rate hike will come, but it’s still a better than average probability that the U.S. will get a rate hike before the other major central banks.
I’m bearish on the British pound ahead of the this week’s U.K. CPI data because inflation has been in a downtrend all year, and with other economic indicators hitting red in the past few weeks (e.g., PMI, Housing, PPI, etc.), prices could remain under pressure.
As I mentioned up above, I don’t know if the super rally in the Greenback is overdone–no one knows really. But I think the odds are still in favor for downward pressure on Cable, especially as U.S. assets tends to look attractive during risk-off sentiment. With major U.K. data coming up though, I’ll look to short a small position on a pullback to where the moving averages and Fibonacci retracement levels meet, and keeping safe with a wide stop. Here’s what I am doing:
Short full position GBP/USD at 1.6250, max stop at 1.6450, profit target at 1.5950
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 1.5:1. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned by following me on Twitter and Facebook!