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Since throwing GBP/AUD onto my watchlist, the forex pair continued its consolidation behavior…at least until yesterday’s comments from the BOE.  Is yesterday’s drop a breakout or fakeout?

GBP/AUD 4 Hour Forex Chart
GBP/AUD 4 Hour Forex Chart

During yesterday’s London session, we got news and data from the U.K. that had forex traders hitting the sell button on Sterling pretty quickly on the session. My man Forex Gump covered the issues pushing the pound lower in his latest Piponomics article, but overall it was the decline in wages and the focus the BOE puts on wage growth that had traders pulling back on future rate hike bets. The British Pound took a hit and has yet to rebound a day later.

I spotted the possibility of a downside breakout last week, and now it looks like I’ve got the confirmation I’ve been looking for with this week’s move.  And since it looks like currency traders have a bit more certainty that a rate hike will be pushed back, I think there’s a lot of give back left off of the Sterling rally since the beginning of 2013.

On the other side of the coin, the RBA isn’t exactly in any rush to hike rates either, and we’ll find out what they’re exactly thinking next week with the release of meeting minutes from the Aug. 5 monetary policy meeting.  Given the string of week data in July (including a surprise jump in the unemployment rate), I think the odds are we’ll see some concern from the RBA and the Aussie to take a hit of its own.  This is why I’m going with a conservative short entry technique on GBP/AUD.

Instead of jumping in at market, I’ll look for a pullback to the Fibonacci retracement levels, which also coincide with the major psychological area of 1.8000.  My stop will be a wide one (weekly ATR) and my target will be a big one, because as I mentioned earlier, I think the long Sterling rally has quite a bit to give back if we don’t have anything to support a rate hike any time soon.  Here’s what I’m doing:

Short full position at 1.8000, stop at 1.8250, max profit target at 1.7500

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 follow what I do. Risk Disclosure.

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 2:1.  I’ll continue to watch the pair’s behavior, and if it looks like I’m not going to get my 1.8000 entry, I’ll re-adjust my entry but stay within my pre-conceived risk parameters.

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!

This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.