I’ve been looking for a short opportunity to play the Brexit drama, and I think one has appeared with this textbook technical setup on GBP/JPY and recent Brexit developments not looking so great at the moment.
Longer-term Downtrend in GBP/JPY?
In case you haven’t been keeping up, the new U.K. Prime Minister hasn’t been having the greatest of luck, both with negotiations with the EU on the Brexit deal and with the U.K. Parliament. And just today, we saw his attempt to suspend Parliament reversed with the Supreme court’s judgement on the unlawfulness of the suspension, all of this on top of comments from EU chief Brexit negotiator Michel Barnier, saying that there was ‘No reason’ for optimism in Brexit talks.
The re-opening of Parliament may be a good thing for Sterling bulls in that there may be time for Parliament to block a no-deal Brexit, but there’s still a big gap between the U.K. and European Union on the the Brexit deal, which I think may be a bigger risk. At a minimum, to me it means a longer period of uncertainty for the U.K.’s economy which would likely lead to weaker economic growth and potentially monetary policy stimulus. Potentially not so good for Sterling and likely a contributor to global growth fears, which would be bullish for the Japanese yen.
So, I’m fundamentally bearish biased on Guppy, and with the pair now hitting the Fibonacci retracment area of the latest swing move lower on the daily chart (149.00 down the 126.50), it’s possible that technical sellers may be checking this area out for potential resistance to form and a return to the longer-term downtrend.
Given everything above, I’ve decided to put up a longer-term position with a wide two weekly ATR stop to give this trade room to breathe. My max target is post-Brexit referendum lows in 2016. Here’s what I’m doing:
Short full position GBP/JPY at market (133.71), max stop at 140.75, max target at 124.00
I’ll be risking 1.00% of my account to start for an initial 1.37:1 return-on-risk, but it’s likely I’ll add onto this position to a max 2% risk given that this is a longer-term trade and I think the odds are pretty good of further Sterling weakness from here unless a Brexit deal magically happens. Nothing to do but wait and read what the Brexit story will give us for now, but when I do decide to adjust, I’ll be sure to update on my blog.
That’s it for now. Stay tuned for updates and 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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