Big week ahead for GBP/NZD with potential catalysts for both Sterling and the Kiwi. Could it be enough to get me in a short positions at a better price?
GBP/NZD Trade Setup
From a fundie standpoint, I’m still holding onto my long-term bearish bias on Sterling that Brexit will have negative effects for the U.K.’s economy, which is likely to keep pressure on the British pound for sometime. But in the short-term, my focus is on the upcoming preliminary U.K. GDP data this week, which could possibly come hotter than expected, as indicated by a recent string of positive U.K. PMI data over the past quarter.
On the other side of the pair, we’ve got the Kiwi dollar which has seen pretty good data on its own right with positive PMI reads, as well as good business and consumer sentiment to support a positive outlook. In terms of weaknesses, low inflation is still a big problem, which is my focus for this week as we’ll get the quarterly CPI data in a couple of days. The forecast is for a 1.2% y/y rise vs. 0.4% y/y previous, but that could easily disappoint given the downtrend in inflation over the past five years.
Combined, I think there’s a good chance for a continued a bounce in GBP/NZD, up to the potential resistance area (broken support turned resistance level / 61% Fib) that I highlighted in the chart above. I think this will be an opportunity to play my longer-term bias, favoring the Kiwi over Sterling.
But before we get to the economic data, we’ve got a big potential catalyst in the form of the U.K. Supreme Court decision on whether British PM Theresa May can start Brexit without Parliament. Odds are against Theresa May on this one, but since we’re in unprecedented territory, I’m going to err on the side of caution with an entry point a good amount above current market prices and with a wide stop. Here’s what I’m going to do:
Short GBP/NZD at 1.7500, stop loss at 1.8025, profit target at 1.6500 for a near 2:1 return-on-risk. I’ll be risking 0.5% of my account on this position and if the market breaks below the previous swing low around 1.6835, I’ll look to adjust my stop and potentially add to the position to maximize my gain.
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.
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