Lots of potential volatility catalysts this week for both the Greenback and Sterling, making this simple technical setup on Cable the one to watch for me. Check it!
Short Play At Descending Highs On GBP/USD?
In case you haven’t caught up with this week’s economic calendar, we’ve got a slew of top tier events from both the U.S. and the U.K., most notably monetary policy meetings/decisions from both the Federal Reserve and the Bank of England. Both are likely to spark short bursts of volatility across financial markets so it’s a good idea to read up on both, starting with Forex Gump’s FOMC Decision preview and Pip Diddy’s GBP weekly forecast posts. Besides those two events, the ISM PMI data and the latest U.S. employment data are top tier economic events that could get USD traders moving and shaking as well this week.
Longer term, I like the Greenback over the pound with the recent strong GDP growth in the U.S., the expectation that the Fed will likely be more aggressive on monetary policy tightening than the BOE, and on the uncertainty on the U.K.’s economic outlook thanks to the constantly changing Brexit story. These conditions aren’t likely to change in the next few months without some sort of shock, which has me pretty confident to go with the recent trend in Cable.
GBP/USD has been in a downtrend since hitting an April high just under the 1.4400 handle, but recently the momentum has slowed to more of a grind lower, producing a pattern of lower ‘highs’ in June and July. If those lower ‘highs’ are retested, we could see resistance from currency traders if the current driving themes remain.
Anything can happen with this week’s events, but if the FOMC holds while the BOE hikes, we could see a push higher up to those falling lows, which is where I am looking to take a small short position on Cable for a medium to longer-term play.
My stop will be a full weekly ATR from my entry to weather a likely increase in volatility, and because of the pair being in a pretty strong downtrend with fundies to back it up, I’m going for a big target, the post Brexit referendum lows at the end of 2016 for a very nice max R:R. Here’s what I’m doing:
Short half position GBP/USD at 1.3210, max stop at 1.3430, max target at 1.2110
I’ll be risking only 0.50% of my account on this position and with this setup, I have an ambitious than 5:1 potential max return-on-risk. Again, these are top tier events and anything could come from them, so I will not hesitate to adjust quickly (i.e., cancel orders, close trade, reverse trade) depending on what happens and how the markets react.
Stay tuned 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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