Momentum shifted in Sterling bulls favor recently thanks to a fresh Brexit development. Is the upside breakout in GBP/AUD a good way to play it out?
Trade Idea: GBP/AUD Upside Breakout
In case you missed it, the British pound has been on a tear higher after news earlier this week that a Brexit bill was within reach. Obviously, this is positive news for the U.K. and with Brexit uncertainty fading more and more recently, I think Sterling optimism is warranted and likely to hang around for a bit.
On the other side of the coin, the Aussie’s days haven’t been as bright with recent economic data mixed (mixed employment data, better trade data, weak retail sales & wage growth) and not likely enough to spark some hawkish commentary from the Reserve Bank of Australia at their monetary policy meeting next week. The Aussie is also likely influence by the price of gold (one of Australia’s biggest exports after iron ore and coal), which has been on a two-day slide to the tune of around -1.49%.
With positive U.K. data and Brexit concerns easing versus my sentiment on the upcoming RBA meeting, I’m still bullish on this pair, especially with trend higher still going strong since the beginning of September.
But since I already have an Aussie short position with my AUD/NZD short, I’m going to be conservative with my entry on GBP/AUD by waiting for a retest of the broken consolidation area around 1.7500. Also, we’re seeing the stochastic signal potentially overbought conditions, so a reversal could be just ahead. This will give me enough room to re-assess the idea if the RBA does come out with hawkish commentary next week.
My stop will be my usual weekly ATR stop to limit my max risk and may target will be the next major resistance area around 1.8300, which was strong support in 2015 & 2016 that was eventually broken. Here’s what I’m going to do:
Long half position at 1.7605, max stop at 1.7245, initial target at 1.8300
I’ll be risking only 0.5% of my account on this position and with this framework, I have a potential max return-on-risk of around 1.93:1….not bad! Stay tuned for updates and adjustments around the RBA meeting, and until then, good luck and good trading!
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