GBP/USD recently fell to a new low on the year at 1.5790. This followed a sideways consolidation during October, after which the bearish outlook still looked persistent. Fundamentally, the dip in GBP/USD is in-line with the monetary policy direction in the BoE vs. FOMC.
Central Bank Assessment: While the FOMC ended QE, and is gearing up to raise rates mid-2015, the BoE has moved back its rate hike schedule. A few months ago BoE governor Mark Carney implied the possibility of a rate hike as early as late 2014. However, the market is now projecting the rate hike to be deeper into 2015. With a prevailing downtrend, the GBP/USD should thus be sold on rallies.
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So far this week, we have seen cable rally from last week’s low of 1.5790 back up to almost 1.5950 today. It is now testing some of last week’s common lows, and the 50-period SMA. We should expect sellers here, in the 1.5950-1.60 area. If price does stall here, and the 4H RSI stalls below 60, get ready for a bearish attempt.
ABC Correction: Also, note that the market is essentially completing an ABC correction. In the very short-term, some will see this as a harmonic correction, and will be ready to short GBP/USD back into its prevailing downtrend.
We might have to plan 2 entries here, 1 around 1.5970, then again below 1.6050, around 1.6030. Our stop will have to be above 1.6050, because above that the bearish outlook might be in trouble.
Now, with a stop at 1.6070, the risk will be
1) 100 pips (entry 1 @ 1.5970)
2) 40 pips (entry 2 @ 1.6030)
A target could be the 1.58 handle. Let’s be conservative in case the GBP/USD is not ready to continue the prevailing trendline.
Potential Reward for entry 1: 170 pips
Potential Reward for entry 2: 230 pips
If only entry 1 is triggered, the R/R. is 1.7:1. If both entry 1 and 2 are triggered, the R/R is 400:140 or 2.85:1.
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Failure: A break above 1.6050 will likely break a falling trendline seen in the daily chart. Although this might not trigger bullish trend, but it does signal a material consolidation that might last a month or more. In this scenario, we should limit the bullish outlook to 1.62, a common resistance seen in the daily chart.
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