Free Profitable Forex Newsletter
Hey! This is Philip with this week's Fx update of the Free Profitable Forex Newsletter!
Since we issued our short GBPUSD call in mid-October, the pair has declined by more than 600 pips and now reached the 1.31 - 1.33 big support area. However, at this point, the sell-off is starting to look a little overdone, with the technicals showing a nice setup on the daily chart that could provide an attractive tactical trade from the long side.
GBPUSD: Look for a bullish break of that falling trendline around 1.3250
As we described in the weekly Fx analysis this Monday, the current GBPUSD levels around 1.32 are actually sitting on a major (weekly/monthly) support area
that’s well-defined between 1.31 and 1.33. This factor alone is important enough that it can hold off further declines for the time being (BOE and Fed meetings will be key next week; more on that below). Furthermore, the big support in this 1.31-1.33 area can be a huge tailwind if GBPUSD starts moving higher.
The daily chart shows that the most recent down leg has a much weaker momentum than the previous bearish leg. Moreover, it is defined by a very narrow downward channel formation, which has compressed the price action of the past 8 - 10 trading days in a small trading range (see chart
below). There are multiple examples from the past when such narrow channels in the Fx market have broken violently, and their entire move has reversed sharply. Could a similar scenario happen to GBPUSD this time? It certainly looks possible, especially with the big support area sitting underneath current levels!
The advantage in the present situation is that we have a clearly defined falling trendline (of the narrow channel), which once broken will tell us that momentum has shifted in favor of the bulls. It is currently located around 1.3250, making this level the specific price zone that GBPUSD
needs to break through to trigger this setup.
If (once) this channel trendline breaks, there will be no big resistance levels until the 1.35 area. This means that GBPUSD will likely reach 1.35 if this bullish scenario gets triggered (a 250 pips upside
potential). Hence, it is our target for this potential trade.
Fundamentals: What could cause GBPUSD to Squeeze Higher?
The next week is a packed one for GBPUSD. There is employment, CPI inflation, and retail sales data from the UK up for release. On top of that, the Bank of England holds its meeting next Thursday (Dec 16), for which markets are pricing
about a 50% probability that they will hike rates. All of this means one thing - high volatility on GBP pairs!
And, specifically for the GBPUSD pair, the US side will add to the volatility next week. The Fed holds their meeting a day before the BOE, on Wednesday (Dec 15). With all these events lined up on the calendar, it’s easy to see why GBPUSD can swing wildly in both directions before we can expect it to
potentially calm down after those events have passed toward the end of the next week.
The positioning factor can provide support for the bulls. COT speculative positioning in GBP is a little stretched to the short side though not extreme. Still, this can be a big tailwind if, for example, the BOE or UK data surprise positively next week as traders would unwind some of those
short positions.
Also, don’t forget the US CPI inflation release tomorrow that can also shake up the GBPUSD pair.
Entry:
- Wait for the break of the falling trendline and a strong move above that 1.3250 level as an entry trigger.
- Furthermore, we need to wait for next week’s Fed (Wed) and BOE (Thu) events to pass before considering the entry. Only after that can we be more confident that any breakout is real.
- Even if GBPUSD breaks above the 1.3250 trendline before the Fed and BOE events, it still wouldn’t be appropriate to enter long as the outcome of these can easily reverse any prior big moves or breakouts!
Stop:
- Below 1.31.
- Keep in mind this 1.31-1.33 is a weekly/monthly resistance area. So, the stop may need some larger breathing room as the price can test lower levels on high volatility, but if it doesn’t close below 1.31 on a weekly basis, it is considered that the support held.
Targets:
Note: We choose GBPUSD for this trade idea simply because the setup on the charts is very well-aligned, and we have clear entry triggers and target levels. However, short EURGBP could also be a good GBP buy trade, which itself is at an important resistance zone at 0.8550 -
0.86.
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