An interesting setup is in the works on GBP/CAD as the bears take back control at a major resistance area. Is this beginning of a longer-term move to the 2019 lows?
GBP/CAD Reversal at Resistance?
On the daily chart above we can see GBP/CAD has been on a steady run higher in the latter half of 2019, managing a +11% rally since hitting lows around 1.5900 back in August. The move was enough to hit a major resistance area around 1.7500 – 1.7800 in December, and it looks like the sentiment has shifted quickly back in the bears favor, likely on the renewed fears of a hard Brexit sparked by Boris Johnson’s moves to prevent any further negotiating extensions in 2020.
Given that I’m generally a fan of the Canadian dollar over the rest of the majors on relative economic strength, (sentiment I think still holds despite the recent round of weak Canadian updates), and with a potential no-deal Brexit back in play, I think GBP/CAD’s big rally has run out of steam, especially if that bearish reversal pattern on the chart above draws in more sellers.
With that and some potential market movers ahead from both the U.K. and Canada to keep volatility high (most notably the Bank of England monetary policy statement), I’m looking to scale into a short position if the market bounce from current levels. My stop will be a wide one given the high average volatility of this pair, and my target will be the strong support area that held back in 2017. Here’s what I’m doing:
Short half position at 1.7300, max stop at 1.7830, max target at 1.6700
Short half position at 1.7500, max stop at 1.7830, max target at 1.6700
If both positions are triggered, I’m only risking 1.00% of my account on this trade and I’ve got max potential return-on-risk of around 1.79:1. I will be willing to adjust this trade quickly if the odds of a hard Brexit drop dramatically and/or Canadian data continues to disappoint enough to raise the odds of some policy easing by the BOC. And if the trade triggers and goes my way, I will look to add to the position, especially if only the first set of short orders are hit.
What do you guys think? Are you watching GBP/CAD for a potential short position as well? Let me know in the comments section below!
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