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Short-term trading idea FX GBP/USD - sideways trend: price trading in the middle of the range

Gabriel Ojimadu

Trading opportunities for the currency pair: This pair has been in a sideways trend for half a year (6 months or 128 trading days). Any news about a 'hard' Brexit has a negative influence on the British pound. The breakthrough of the minimum from the 7th of February has opened the way to the lower line of the "2-2" channel. The distance to the lower boundary of the channel at 1,2210 is 160 pips while the distance to the upper line at 1.2550 is 180 pips. If we don't experience an upwards bump today and the pound continues to slide, then it's better to think about selling.

As the price reaches 1.2210, we will have to keep an eye on price behaviour. If we consider that a triangle has formed from a minimum of 1.1905, then there is a high likelihood of the pound falling to 1.0205 or lower.

If on Monday, the price rebounds from 1.2370, there is a chance of it first returning to 1.2550, and then to 1.2710. I'm allowing for this kind of growth in the wake of an interest rate hike from the US Federal Reserve in June. In such a case, it's worth keeping a further eye on the dynamics of US bond yields and the EUR/GBP cross. It may be worth opening some long positions over the next few days if the rate restores to 1.2530 and subsequently falls to 1.2420. I've shown this forecast on the chart. If the price doesn't follow my forecast then it's better to hold off on buying.

Background:

The previous trading idea for this currency pair was published on the 3rd of October. At the time of publication, the pound was trading at 1.2971 USD. Since the 6th of July, the pair has been in a sideways trend within a 6,820 pip range. In theory, I was hoping to see some cyclical movement with the previous correction before Brexit. Traders were planning to buy pounds from the lower boundary of the channel as a bullish signal was generated on the Stochastic oscillator and were looking for an entry point on the smaller timeframes.

This idea was in vain, as on Monday the 3rd of October, the British pound was the centre of attention and exited the channel. The market opened with a bearish gap of 56 pips. During trading in Europe, the price collapsed by 100 pips to 1.2846.

The British pound came under pressure from a statement made on the Sunday by Prime Minister Theresa May. She said that the UK would officially begin the process of leaving the European Union by the end of March 2017.

On the night of the 7th of October, the pound depreciated against the dollar by 5.6% (-708 pips) to 1.1905. Traders and analysts were at odds to explain what triggered this collapse as there had not been any significant press release relating to the matter at the time. At the time, I thought that in such a narrow market, the pound had brought down the algorithmic systems in place to break down price levels.

The Bank of England publicly stated that there were no fundamental reasons for the fall and that it would start its own investigation. At the end of last year, the Vesitfinance website published an article on this matter. It turns out that the second stage of the pound's fall coincided with a large number of buy requests from Citi traders. One source said that traders simply panicked. In this short time, sell orders on the British pound were met with zero interest in purchases due to Brexit.

 

Fig. 1: Daily timeframe. Source: TradingView.

After the first stage of the pound's collapse (2,230 pips), the upwards correction was less than 38%. After the second stage, the British pound recovered 50% of its losses against the dollar from its fall from 1.3745 to 1.1905 (-1,840 pips).

The pair has now been in a sideways trend for the last 6 months (128 trading days). Market participants now seem reluctant to trade on the pair given that any news whatsoever that may be indicative of a hard Brexit will weigh negatively on the pound.

Two ranges have formed on the daily timeframe. The "1-1" channel is located between 1.2040 and 1.2710 levels, while the "2-2" channel is between 1.2270 and 1.2568. The second channel is narrowing to form a symmetrical triangle. At the time of writing this review, the British pound can be found in the middle of the "2-2" channel.

The pound has a bad day on Friday during the European session, coming under pressure from disappointing industrial production figures in the UK.

Trading closed down after mixed data on the labour market from the US. In March, the US created twice fewer jobs than had been forecasted. Moreover, the figures for January and February were downgraded. On the bright side, unemployment fell by 0.2% to 4.5%.

The US created 98,000 new jobs outside the agricultural sector in March, with a forecast of 180,000. The figure for February was downgraded from 235,000 to 219,000, and for January from 238,000 to 216,000. The cumulative revision for the two months came to -38,000. The January figure was revised last month from 227,000 to 238,000. It seems that markets are toying with us each month by giving us constantly revised figures.

The participation rate has remained at 63.0%. Unemployment has fallen from 4.7% to 4.5% (forecasted: 4.7%, previous reading: 4.7%). The average hourly earnings index came to 0.2% (forecast: 0.2%, previous figure revised from 0.2% to 0.3%).

In the latest COT (Commitments of Traders) report on the 4th of April, which was published on Friday by the Commodity Futures trading Commission (CFTC), large and small speculators reduced both their short and long positions. The reduction in short positions was bigger than that of long positions.

Large speculators (non-commercial): long positions fell by 3,719 to 28,418 contracts, while short positions fell by 7,896 to 132,642 contracts. Net-short positions fell by 4,178 to 104,224 contracts.

Small speculators (non-reportable positions) reduced their long positions by 1,031 to 27,066 contracts, while short positions fell by 1,159 to 34,284 contracts. Net-short positions fell by 127 to 7,218 contracts.

The COT report gives us a mixed picture. Both buyers and sellers are leaving the market. Open interest has decreased by 6,654 to 282,707 contracts.

What does the current technical picture tell us? On Friday, sellers brought the 29th of March's minimum of 1.2376 down, which formed when Theresa May triggered Article 50, formally beginning the UK's exit from the EU. The breaking through of the minimum at 1.2346 from the 7th of February has paved the way towards the lower line of the "2-2" channel. The distance between the current level of 1.2370 and the lower line of the channel at 1.2210 is 160 pips, while the distance to the upper line at 1.2550 is 180 pips. If we don't see an upwards rebound this Monday, and the pound continues to slide, then it's better to consider taking out short positions in small volumes.

As the price reaches 1.2210 we will have to look more closely at its behaviour. If we consider that a triangle is forming from the low at 1.1905, there is a high probability of the pound falling to 1.2050 or lower.

If the price rebounds from 1.2370 level on Monday, then there is a chance of the price first returning to 1.2550 and then to 1.2710. I'm allowing for growth to this level in anticipation of a rate hike by the US Federal Reserve in June. In this regards, it's worth keeping an eye on the dynamics of US bond yields as well as the EUR/GBP cross.

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Attention:

Forecasts which are made in the review constitute the personal view of the author. Commentaries made do not constitute trade recommendations or guidance for working on financial markets. Alpari bears no responsibility whatsoever for any possible losses (or other forms of damage), whether direct or indirect, which may occur in case of using material published in the review.

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