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GBP/AUD has been in a strong downtrend, but I think the conditions may be right for a short swing higher on recent strength.

Before you move on, for those who are not familiar with my framework, signals, setups, or acronyms, please visit my discretionary trading framework blog.

GBP/AUD 4-hour Forex Chart
GBP/AUD 4-hour Forex Chart

In the past week, we saw Sterling gain strength despite weak reads from both the U.K. unemployment data and a big downside surprise from last Thursday’s U.K. retail sales data. There could be many reasons for this, including a shift in whether or not we’ll see a Brexit, but it could be that there just may not be many sellers left after the strong downtrend from the September 2015 high around 2.2300.

To add fuel to the recent bullish move in GBP/AUD, Australia just released weaker-than-expected quarterly CPI data, showing deflation for the first time in seven years. I think this will provide the underlying fundamental catalyst for movement in GBP/AUD in the short-to-medium term.

With that in mind, I think a countertrend long is the right move in the short-term, but I think I’ll be a bit more risk averse than usual since this is counter to the higher timeframe price action.  So, I look to go long with a small position on a pullback to the previous major psychological area of interest.  My stop is nearly the weekly ATR and I’m going for a near 1:1 target, not looking for a big gain, again because I am going against the trend.  Here’s what I’m doing:

Long half position at 1.9000, max stop at 1.8575, max profit target at 1.9500

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 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1.17:1. 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 by following me on Twitter and Facebook!

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.