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GBP/USD Ascending Channel Provides Swing Trading Opportunity

GBP/USD Ascending Channel Provides Swing Trading Opportunity

2011-05-24 20:14:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The Cable has been entrenched in an ascending channel for the better part of the last year, having been in the trend since last July. As denoted in the chart below, it appears that the GBP/USD pair is in the midst of another corrective wave after hitting its range top on the last trading day of April. The rally against the Pound in May, or rather, into the Japanese Yen, Swiss Franc, and United States Dollar, has been the result of widespread risk-aversion as European sovereign debt fears have been ratcheted up over the past three-plus weeks. That being said, the situation for Great Britain isn’t optimistic either; house prices continue to fall, the country remains steeped in a soft labor market, and producer prices maintain their climb – to such a point that the consumer price index rose by 4.5 percent in April. Thus, should the GBP/USD pair be able to maintain today’s gains headed into the overnight, a swing trading opportunity has emerged for traders to collect profits on a Cable short, with the British GDP release as the catalyst for the trade.

Levels to Watch:

-Range Top: 1.6840 (Trend)

-Range Bottom: 1.5855 (Trend)

GBPUSD_Ascending_Channel_Provides_Swing_Trading_Opportunity_body_Picture_4.png, GBP/USD Ascending Channel Provides Swing Trading Opportunity

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

  • Short: Place an entry at 1.6298 (50-SMA)
  • Stop: Set the stop to 1.6369 (20-SMA, 71-pip risk)
  • Target: The first target is 1.6148 (100-SMA, move up stop to 1.6254), second target is 1.5935 (March low)
  • Timeframe:5 to 10 days

Trading Tip With no significant data in the overnight for either country, the pair could extend today’s rally before the highly significant British GDP release. While the data release itself won’t be market moving, it will bethe implications on potential rate movements by the Bank of England, in that another miss by GDP would signal that low rates would need to continue despite continued inflationary threats. Accordingly, if the rally is able to continue to the 50-SMA, approximately another 100-pips, then a short opportunity is in place given the risk-averse nature of the market over the month of May. The daily RSI is rising, supporting this notion, now at 49, though is falling on the 6-hour chart, at 43. Similarly, the Slow Stochastic oscillator differential is barely positive on the daily chart, with the %K greater than the %D as of today, at 24 and 20, respectively. However, pointing towards continued weakness despite today’s gain by the Pound-Dollar pair is the MACD Histogram, which, ahead of today’s rally, has been continuing to diverge in a bearish pattern, with the differential at -29. While the GBP/USD pair was able to find support at its 100-SMA (unable to post consecutive closes below on the daily chart), and the technical picture advocates a long position, given the risk averse nature of the market, and the expected GDP release tomorrow at 08:30 GMT, the Cable could head toward its ascending channel bottom since last July.

Event Risk for the United Kingdom and the United States

Both the United Kingdom and the United States have some significant data due over the next 24-hours, though Great Britain has one of the more historically market moving releases of the week, with growth data due at the start of the European session tomorrow morning.

United Kingdom – The United Kingdom has a slew of significant data due tomorrow, though all of it leads to the aggregate gross domestic product growth figure. The U.K. economy is forecasted to have grown by 0.5 percent on a quarter-over-quarter basis, while having grown at a 1.8 percent on a year-over-year pace. However, given the state of the U.K. economy – high unemployment, surging inflation, a depressed housing market, and austerity measures by the government – the figure could come in worse than expected. As such, Pound-based pairs could be exceptionally vulnerable tomorrow.

United States – There is significant data due out of the world’s largest economy this week, with the most significant event coming on Thursday. However, with multiple other events deemed of at least medium importance, there is sure to be volatility for Dollar-based pairs before the release of growth data on Thursday. Before then, on Wednesday, durable goods orders are due ahead of the opening of U.S. equity markets, and a stronger-than-expected figure – forecasted at -2.5 percent – would continue to boost prospects of a firming recovery in the United States following today’s cautiously optimistic new home sales data.

Data for May 22 to May 27

Data for May 22 to May 27

Date

United Kingdom Economic Data

Date

United States Economic Data

May 25

Gross Domestic Product (QoQ) (YoY) (1Q P)

May 25

Durable Goods Orders (APR)

May 25

Private Consumption (1Q P)

May 25

House Price Index (MoM) (MAR)

May 25

Government Spending (1Q P)

May 26

Gross Domestic Product (1Q S)

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

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