Forex Watchlist: GBP/USD Correction Levels

I’m not planning on taking any USD trades ahead of the U.S. elections but I’m keeping close tabs on this textbook retracement setup on Cable. Here are the levels I’m watching.

GBP/USD Trade Setup

Cable is finally pulling up from its month-long dive back in September so I used the Fibonacci retracement tool to spot potential correction levels. Price is moving past the 38.2% Fib already, which suggests that a larger pullback is in order. I’m eyeing the 61.8% Fib area near the 1.2900 major psychological level, which lines up with a broken long-term support, as a conservative entry point for a short position.

Stochastic is already indicating overbought conditions and is starting to turn lower, hinting that pound bears may be ready to push for another decline. If so, the 50% Fibonacci retracement level might be enough to keep gains in check.

GBP/USD 4-hour Forex Chart

GBP/USD 4-hour Forex Chart

Then again, volatility is likely to pick up during the U.S. elections so there’s no telling how high this pair could spike once the state results start trickling in. I’m thinking the reaction to this event could be similar to that of the EU referendum when price tossed and turned violently before picking a clear direction once the results were confirmed. Because of that, I won’t be setting any entry orders just yet but I’ll be on the lookout for confirmation that the downtrend could resume.

I’m keeping a long-term bearish bias on the pound because of Brexit uncertainties as always, although the British High Court ruling last week could delay these risks and provide temporary relief for the U.K. economy. Sellers could hold out until the U.K. government makes its appeal to the Supreme Court, but at the end of the day the U.S. economy is faring much better against its peers and the Fed could still be on track to hike rates.

I’m considering scaling in this trade at the 50% and 61.8% Fib levels, with a wide stop past the swing high and 1.3500 mark. I’ll be aiming for the spike down to 1.1500 but I’ll trail my stop to entry once price tests the support around 1.2100.

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.

Risk Disclosure
Pipcrawler’s Q3 2016 Blog Trading Performance