Cable has made a significant bounce in the past few weeks and now it’s testing a few technical arguments for sellers to test the waters. Will the forex downtrend resume?
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On the daily chart above, after bouncing from the 1.4600 handle we can see GBP/USD reaching an area that’s debatable for sellers to dip their toes back in the water.
First, there were a couple of occasions in December and February where the pair either consolidated or reversed the market, making 1.5500 – 1.5700 an area of strong interest. Next, we’ve got the moving averages and 38% Fibonacci retracement level mixing it up with that area of interest to potentially draw in retracement players and those who see the MA’s as dynamic support and resistance. Finally, the stochastic indicator is signaling potentially over bought conditions in the short-term.
Of course, I’m not sure if we’ll see a return to that monster downtrend since last summer, but I think there is potential for at least a short-term reversal, with the upcoming Bank of England inflation report coming up. For those who have been following inflation conditions in the U.K., we saw a record-low of zero percent in February and March, so the data trend has been lower. And with conditions so low, it’s unlikely we’ll get rhetoric of a rate hike by the BOE anytime soon, but there is risk that upcoming comments from BOE Governor Carney won’t be so bearish with oil making a decent recovery to the low $60/barrel range since bottoming out around $42/barrel in March.
So, I’m dipping my toes in Cable on the chances that the inflation report is likely to be more bearish than bullish for Sterling, and may even overshadow the U.K. unemployment data that comes out in the same session. As for the U.S. side of the pair, expectations for a rate hike are still likely in 2015 but probably not in June. This has put pressure on the Greenback since the last FOMC meeting, but still being the first to possibly raise rates, I think there are longer-term players out there looking for ways to get back long Greenbacks. For now, I’m going in at market with a wide stop to hopefully weather the upcoming volatility, and my target will be recent swing lows and beyond for a nice R:R ratio. Here’s what I am doing:
Short GBP/USD full position at market (1.5570), stop at 1.5920, profit target at 1.4600
I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2.77:1. And I’ll likely close this trade down early to limit my loss if the BOE inflation report signals a rate hike sooner than expected, and/or we get a very bullish unemployment number from the U.K.