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GBP/CAD Sideways Channel Provides Swing Trading Opportunity

GBP/CAD Sideways Channel Provides Swing Trading Opportunity

2011-05-25 19:57:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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In recent days, the British Pound has been buoyed by an economic report issued by the OECD stating that the Bank of England would have to raise its key interest rates by the end of the year in order to prevent the economy from overheating – not on a growth basis, but on an inflation basis. On the contrary, a strong Loonie in 2011 has helped insulate the Canadian economy from inflation, and thus, the interest rate outlook for the Bank of Canada remains softer than that of England. Accordingly, speculation on interest differentials has helped boost the Sterling-Loonie pair. Now, as the pair looks ready to test the range top of a sideways channel established since the beginning of November, a short opportunity has come into play to swing trade the GBP/CAD pair lower, as the recent run up will likely lose steam as it tests psychologically significant levels.

Levels to Watch:

-Range Top: 1.6171 (Trend)

-Range Bottom: 1.5284 (Trend)

GBPCAD_Sideways_Channel_Provides_Swing_Trading_Opportunity_body_Picture_1.png, GBP/CAD Sideways Channel Provides Swing Trading Opportunity

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

  • Short: Place an entry at 1.6171 (Range Top)
  • Stop: Set the stop to 1.6300 (129-pip risk)
  • Target: The first target is 1.5782 (100-SMA, move up stop to 1.6000), second target is 1.5608 (May Low)
  • Timeframe: 5 to 10 days

Trading Tip The GBP/CAD pair broke a descending trend line from the February and March highs yesterday, after failing on its initial test to break through the 1.5962 level on May 5. The pair is now pushing towards a test of its range top in a swideways channel that it has carved out since early November. That being said, the recent run up by the Pound seems to be on speculation rather than driving fundamentals. Now, the GBP/CAD pair, like other Sterling-based pairs, is reading overbought technical levels. On the daily chart, the RSI is 61, and rising, while on the 6-hour chart, it has flirted with the overbought limit, and has slipped slightly to 69. Similarly, the MACD Histogram’s divergence is continuing to widen in a bullish direction. With the Slow Stochastic oscillator trending higher on the daily chart, a short play isn’t ready – yet. However, if the Pound is able to find meaningful follow through on its breakout above 1.5900, a test of the sideways channel’s range top will be the next level of major resistance. According, at that point, it’s possible to see the GBP/CAD pair head back towards levels it hasn’t traded at since early April.

Event Risk for the United Kingdom and Canada

Neither country has any significant event risk on the horizon for the remainder of the week.

United Kingdom – With no significant events on the docket for tomorrow, it appears that one of two factors will dictate Sterling-based pairs: the market’s appetite for risk, predicated on weak British fundamentals, or the OECD’s report for the Bank of England to raise interest rates.

Canada – Canadian data has been thin all week, and with no data due tomorrow, the Canadian Dollar will look for support from a weaker U.S. Dollar, and thus, higher commodity prices.

Data for May 22 to May 27

Data for May 22 to May 27

Date

United Kingdom Economic Data

Date

Canada Economic Data

Written by Christopher Vecchio, Currency Analyst

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

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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