Are we finally at the end of the Brexit saga? If so, this could mean a continued monster rally ahead for Sterling, and I’m eyeing EUR/GBP as the way to play it.
I’ve been wanting to short EUR/GBP forever as I think the U.K.’s economy is likely in a better place than the Euro area IF there wasn’t this whole Brexit thing going on to slow business investments, consumer credit and spending. But now with reports of Boris Johnson securing a deal with the EU, we’re getting pretty close to at least avoiding the dreaded no-deal Brexit scenario, which has been bullish for Sterling so far. Now, we’ve got to see if the U.K. Parliament will support this new deal, and if it does, it could be off the to races for Sterling bulls.
The U.K. Parliamentary vote for the new Brexit deal is on Saturday and it looks like it stands a better chance of passing than when Theresa May tried to push her version of the withdrawal deal through. Northern Ireland’s Democratic Unionist Party seems to be the only roadblock at this point, but if Johnson can convince enough of the opposition Labour Party to support the deal, it might just get through.
So, it seems to be 50/50 odds to me on whether or not we get a Brexit deal to happen by Oct. 31,and if not, I think the odds are pretty good that we’ll at least seen an extension requested and approved. If the former scenario plays out, I think the three years of under performance Sterling saw against the euro since the Brexit vote could be taken back, meaning the potential reward could be very, very good for Sterling bulls. Remember that Sterling lost almost 20% of its value to the euro after the event. If it’s the latter scenario, I think avoiding a no-deal Brexit is enough for further Sterling gains for now.
With those scenarios in mind, I’m going to play EUR/GBP to the short side, but I’m going to be prudent with my entry. I’ll be scaling into the event with nibbler positions, starting with a very tiny one at current market, with additional orders at the strong level of interest/Fibonacci retracement area one the four hour chart above. My max stop will be one weekly ATR from the higher orders. Here’s what I’m doing:
Short quarter position EUR/GBP at market (0.8635), max stop at 0.8960 with 0.25% max risk, max target at 0.7050
Short half position EUR/GBP at 0.8790, max stop at 0.8960 with 0.50% max risk, max target at 0.7050
I’m only risking 0.75% of my account on this trade if both starting positions trigger, and I’ve got max potential return-on-risk of around 8.4:1. I do look to add to this position to get up to my max risk of 1.00% based on how this weekend and other future events go, but I also will not hesitate to close everything out if the odds of no-deal Brexit rise again.
What do you guys think? Am I being too conservative with my entry and should buy now? Let me know in the comments section below!
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