Taking a shot on GBP/NZD for a longer-term position as the pair is showing signs of weakness around a major area of interest.
GBP/NZD Reversing Lower?
For today’s idea, I’m playing a few technical arguments to short ahead of some potential bearish fundamental catalysts and drivers for GBP/NZD.
The main fundamental driver I’m focusing on is the Brexit situation in the U.K. It’s just terrible that negotiations are going no where, not only between the U.K. and EU on the Irish backstop, but even within the U.K.’s government, with today’s rejection of British PM Theresa May’s latest Brexit plan. This has been terrible for the British pound over the past few weeks, and odds are it’s not going to get any better any time soon, as well as continue to affect the British economy negatively.
I’m selling British pounds against the New Zealand dollar on a few fundamental arguments:
- It’s a higher-yielding currency so I do get positive carry for holding it longer-term.
- The RBNZ surprised the markets this week by holding on to their interest rate hike outlook, which should hold off rate cut bettors for a while.
- Broad global risk sentiment has been positive and should remain as long as the U.S.-China trade negotiations continue to progress and global central banks stay away from tightening rhetoric.
So, I’m obviously favoring the Kiwi over the pound for now, and on the Daily chart above of GBP/NZD, we can see the pair breaking down from a significant area of interest–the 1.9000 psychological handle. This held as support throughout early 2018 until broken near the end of the year. It’s been retested this year, and after retesting with a head-and-shoulders pattern after a 50% Fib bounce, the pair is back lower and apparently ready to break the neckline and rising lows pattern.
It does look like the market is breaking down after a couple of red candles, so I’m taking a short position now. My stop will be two times the weekly ATR since this is a big time market mover, and my longer-term target will be the majors lows last seen at the beginning of 2017. Here’s what I’m doing:
Short a full position GBP/NZD at market (1.8710), max stop at 1.9625, max target at 1.6850
I’ll be risking only 1.00% of my account and my potential max return-on-risk is about 2:1 for now. Of course, I’ll look to add further to the position or adjust quickly (i.e., cancel orders, close trade, reverse trade) depending on how the Brexit story develops, if global risk sentiment continues to stay positive, and if the RBNZ changes its tune on interest rates.
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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