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Pairs to Range Trade

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The Dominant GBPUSD Trend Holds As Strong Resistance For Recent Range

Tue, Feb 24 2009, 05:42 GMT
by John Kicklighter

DailyFX

With fundamental headlines stoking concern over the economic health of major economies, protectionism, threats of broad nationalization and the possibility of another financial seizure, there is risk for range conditions at every corner of the currency market. However, can unsubstantiated speculation override dominate trends that are founded on confirmed data? That is the question we have to ask with GBPUSD.

Why Would GBPUSD Hold a Range?

• Levels to Watch:
  -Range Top: 1.4725 (Trend, Fib)
  -Range Bottom: 1.4125 (Fib, Pivot)

• A general fundamental comparison of the dollar and pound pits the currency that is considered to be furthest along the recession curve against the one that is furthest behind. This is a much simplified version of the GBPUSD’s fundamental scene, but they are the factors that could help define the dominant trend. Speculation of nationalization in the US and the efforts by policy officials to support their domestic economies are also considerable threats.

• The dominant trend behind this pair is important as a short-term rebound has brought spot within range of a major falling trendline that began bank on Nov 5th. With time, this trendline will soon coincide with a notable 38.2 percent Fib. Today’s reversal does not preclude the pair from eventually hitting our entry; but momentum should be monitored closely.

Suggested Strategy

• Short: Half-size entry orders will be placed at 1.4660 – aggressive but necessary.

• Stop: Our initial stop will be set at 1.4820. This will cover the trend, but isn’t suited for volatility. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (160) at 1.4500 and the second at 1.4320.

Trading Tip – With fundamental headlines stoking concern over the economic health of major economies, protectionism, threats of broad nationalization and the possibility of another financial seizure, there is risk for range conditions at every corner of the currency market. However, can unsubstantiated speculation override dominate trends that are founded on confirmed data? That is the question we have to ask with GBPUSD. The pair has developed a weak, bullish rebound and is now coming upon a clean trendline that been well-formed through nearly four months of price action (which could also stand in as the symbolic ‘line in the sand’ for the bear wave that began back in November of 2007. With today’s intraday reversal, this pair is already having trouble building the momentum needed to overtake such a clear formation. A side effect of this fading momentum though may be that this strategy may take some time to trigger. It is certainly preferable to have price come to us for a good risk/reward setup than chase a trade that would require an unrealistic set up. Nonetheless, with too much time, market conditions could change. Therefore, we will cancel any open orders by Thursday’s close or should spot hit 1.42 before entry.

Event Risk UK And US

UK – There is little in the UK’s economic dossier to be bullish about. The financial crisis has pushed many British banks to the edge of bankruptcy, the IMF has predicted the UK would suffer the worst economic recession of the major economies through 2009 and all the while the BoE is running out of options. However, there is also a point of equilibrium when comparing two currencies and the economies they represent. For the pound’s part, the pressure behind its status as the weakest currency among its peers will depend on how consistent its fundamental deterioration is. This means steady declines in credit conditions, housing, business investment, consumer spending and general growth. Over the coming week, we will see a number of indicators that will cover these fundamental angles. The most closely watched figures though will be the potential revisions to component GDP data.

US – The US dollar is in a unique position. Recently, we have seen the currency tighten its correlation to risk trends. With a benchmark lending rate essentially at zero and a laundry list of government initiatives aimed at revitalizing the economy; we have seen currency traders transfer their funds into US treasuries and other securities (even shunning the Japanese yen as the top safe haven). At the same time, we have also seen the dollar gain ground when general sentiment across the markets has improved. This is likely due to the economy’s forward position on the recession curve and the expectations that returns could be revived in the US before its major counterparts. From the calendar, we have a few volatility hurdles to be concerned with.
Consumer confidence is a key reading with policy makers and economists looking to see how Americans are responding to policy efforts to turn spending around. A surprise market mover may be the second reading on the 4Q GDP data. While this is a revision, it is open to a significant change, which could undermine the dollar’s new position as top safe haven.

Published on  Tue, Feb 24 2009, 05:46 GMT