In our last piece, we looked at a short setup in GBP/USD after a trend-channel resistance inflection, combined with the major psychological level at 1.5500 for stop placement. All three targets provided for the short-side were quickly met, as FOMC-driven USD-strength brought the Cable below the vaulted 1.5250 psychological level, albeit temporarily. But USD-weakness on Thursday and Friday of last week propelled GBP/USD right back to the upper trend-line of the resistance channel, eventually giving way to surging prices. The open of this week saw a continuation of that move, as GBP/USD put in a near-term top just shy of the 1.5500 psychological level that had provided ‘brick-wall-like’ resistance just last week. With an extremely heavy day of data on the calendar for Thursday, traders may be best served by waiting on setups in GBP-pairs unless anything is especially attractive.
The near-term direction here would be convoluted, to say the least. While last week’s lows at 1.5245 could be considered a ‘higher-low,’ this morning’s failure to break above 1.5500 could be construed as a ‘lower-high,’ leading into that undesirable, wedge-like price action that merely shows congestion in a market. To be sure, this is emblematic of a heavy data-day on the calendar, as you’re not the only trader that wants to control risk going into a big release; markets will often funnel ahead of the news as risk-taking wanes ahead of the ‘big driver.’ This Thursday marks ‘Super Thursday’ for the Bank of England. We will get an interest rate decision (no move is expected), meeting minutes (which could be telling towards when a move COULD be expected) and final inflation forecasts (which will likely be the determinant towards when a hike will be expected).
With such a huge docket of news set for later this week, traders would likely want to look for larger risk-reward ratios to offset this heightened risk environment. For this purpose, the short-side could appear more attractive, as resistance in the 1.5500 area could provide an adequate level of risk management. Traders could look to lodge stops just above this major psychological level, with targets at 1.5308, which is 23.6% of the ‘big picture move’ in GBP/USD, taking the 2007 high to the Financial Collapse low. This could afford a 1-to-2 risk-to-reward ratio, which should be the minimum given the extreme risk that may ensue. Should 1.5300 come into play, additional short-side targets could be cast towards 1.5250 (major psychological level), 1.5184 (23.6% retracement of the most recent major move), and then 1.5000 even (major psychological level).
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