Dealing with a falling GBPUSD
This week the Bank of England cut the official bank rate to 25 basis points, and announced a resumption of its asset purchase program. The Bank of England also left the door open to doing more. Many expect another rate cut to bring rates closer to zero. In terms of market reaction GBPUSD has slumped two cents in the wake of the Bank of England's announcement (see our Morning Report APAC for details).
Technically speaking, we see the following technical setups:
1. Rising wedge in a downtrend (GBPUSD bearish)
2. Slow Stochastics (9,5,5) having a bearish crossover (GBPUSD bearish)
3. MACD (34,5,5) about to have a bearish crossover (GBPUSD bearish)
GBPUSD daily chart (click to enlarge)
Source: Saxo Bank. Create your own charts with Saxo Trader click here to learn more
We should buy when the stock/currency is rising, and sell when the stock/currency is falling. Post Brexit, we remain mid-term bearish on GBPUSD.
In addition, the Non-Farm Payrolls (NFP) in the US tonight provides an element of event risk into this trade idea (read here a preview by Juhani Huopainen). However, our analysis indicates that the Automatic Data Processing (ADP) NFP, usually released 2 days ahead of the government NFP, has so far this year correctly predicted the NFP surprise 6 out of 7 times:
This week’s Wednesday, the ADP NFP beat it’s forecast, and if history were to repeat itself we should see the NFP beat its forecast (+180,000 jobs) tonight. Should this happen, we expect the USD to bounce and GBP selling to accelerate.
Management and risk description
We can commence the GBPUSD sell at the break of the rising wedge (~1.3080). In addition, we can minimize the risk of the trade through an entry stop order.
Entry: Sell GBPUSD via a entry stop order at 1.3080, GTC
Stop: We base our stop on 2 x ATR, i.e. 1.3080 + 2(0.0131) = 1.3342
Target: When the Slow Stochastics next exhibit a bullish crossover, indicating that downside momentum has eased.
Monthly GBPUSD 5-year-chart (click to enlarge)
Non-independent investment research disclaimer applies. Read more
— Edited by Clemens Bomsdorf