Selling GBPUSD, looking for test of range lows and beyond

Trade: Selling GBPUSD around 1.6095 – 1.6115

Stop: 1.6155 bid

Targets: 1.6005 and 1.5930

• GBP: With the enormous Euro rally of late, the market is suggesting that the tail risks associated with a feared breakup of the EU will continue to unwind. As GBP has served as a safe haven from the Euro recently, the ongoing unwinding of its safe haven status could continue apace and make GBP a relative under-performer as EU peripheral spreads come in further.
• USD: The greenback has perhaps been oversold given the risk that the FOMC is changing its tune on the prospect of further QE beyond the end of 2013 (see important note, however, under Risk below). As well, the US is heading toward more fiscal austerity as it moves to mollify “deficit hawks” among the ranks of House Republicans as the spending (sequestration) portion of the fiscal cliff negotiations were merely delayed two months from the Dec 31 deal. There is also the issue of the debt ceiling which will demand some kind of spending deal. As Obama has also made campaign promises on reining in spending, the move to shrink public spending could fuel further fears of economic weakness and reduce risk appetite.
• Technically, the enormous reversal around the 1.6300 area sets the tone for GBPUSD and suggests the risk of an ongoing bout of trading within the larger range down toward 1.5300 eventually. More locally, after an attempt higher above 1.6125 resistance late last week, the pair was unable to maintain altitude despite a very weak USD late last week. This trade looks at trading toward the bottom of the recent range down to 1.6000 and then beyond on a break and test of the 200-day moving average.

Trade Management: If the pair trades below 1.6050, traders might bring the stop down 35 pips and if the first target at 1.6005 is reached, another 35 pips until the second target is reached.

Risk: Traders should be aware that the outcome of this trade is heavily dependent on an appearance by Ben Bernanke this evening at 2100 GMT, which could push the pair either way.

Short-term Chart:

Longer-term Chart:

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