Free Profitable Forex Newsletter
Hey! This is Philip with this week's trade idea of the Free Profitable Forex Newsletter!
GBPUSD is rallying this week and today crossed above 1.37 after initially failing to sustain those levels yesterday. Several factors are contributing to the rally, the main ones being the broad USD correction this week from the USD side, and restored hawkish expectations for Bank of England policy from the GBP side.
The pound remains well-supported broadly, not only against the retractive dollar. EURGBP is again pressing on the lows around 0.8450 while GBPJPY just broke to new yearly highs above 156.00. However, further gains for GBP will likely get much harder, especially against the EUR and
USD. The risks for the pound are increasingly turning to the downside as the currency is rising. The economy is set to slow further, and while inflation is high like everywhere, the slowing growth is likely to limit the scope of BOE hawkishness.
GBP resilience is unlikely to last for much longer
In many of our recent Fx weekly analysis posts, we’ve been saying that a lot of the good news for GBP is already in the price of the currency, and with that,
the risks for a downward correction are increasing. There is also potential for a “buy the rumor sell the fact” behaviour around the event when the BOE actually hikes. Therefore, with the new GBP rally this week, looking to short the British currency is becoming attractive again from a risk-reward perspective. In this regard, the US dollar looks like the best counterpart to short GBP against as the USD is set to remain strong in the coming months as
the Fed starts tapering QE purchases.
Next week could offer opportunities to short GBPUSD at slightly higher levels (preferred around the 1.38 area, see why in next section below). UK CPI inflation and retail sales are due for release and could give more clarity on the GBP outlook. If inflation falls short of expectations,
GBP bulls will be disappointed, and this whole rally could quickly reverse down.
Below, we look at the technicals and the specific price area where shorting GBPUSD would make the most sense.
The 1.38 area is very attractive for establishing shorts
Since the summer, GBPUSD has been bouncing back and forth inside of a downward channel formation. The steep sell-off around the turn of the month scared everyone into thinking that GBPUSD could plunge further to the low 1.30s. Instead, the channel’s support held, and cable bounced.
However, it is that time again now of the price reaching the upper boundary of this channel. By the same token as the bounce two weeks ago, gravity should pull the price down from the 1.38 area. There are also
additional good reasons why looking to short GBPUSD near 1.38 is an attractive trade.
The following factors meet around 1.38 to form a strong band of resistance in this area:
- Resistance trendline of the channel, as noted above
- 100-day (orange) and 200-day (red) moving averages north of 1.38
- Monthly pivot resistance level 1
- Fibonacci levels, of which the 0.786% retracement at 1.3860 is notable
- Prior swing highs from September are around 1.3850
So the resistance area is roughly between 1.3850, though the price could, of course, poke a little above this range. Practically, looking for a bearish signal or reversal chart pattern at these levels should provide a good indication if the resistance area will hold or not.
Early signals would come on the intraday chart, while a bearish signal on the daily chart will give us the final confirmation that this trade is on.
- Wait for the price to reach the 1.38 area and then look to sell on bearish reversal signals; price action on smaller timeframes will give early clues
- Above the resistance band at the 1.38 area
- For specific levels to place the stop, above 1.39 would be appropriate as those are the last highs
- 1st: 1.36
- 2nd: 1.34
- 3rd: 1.32
Trade signals from past week
- October 8, 2021 – Short USDCAD from 1.2540, exited early at 1.25 amid NFP miss and Canadian jobs beat = -40 pips
- October 8, 2021 – a 2nd short USDCAD from 1.2473 with a tight stop was tried, but that too was eventually stopped out = -10 pips
TOTAL: -50 pips in the past week
TOTAL: +4035 pips profit since October 1, 2018
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