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GBPUSD Setup Never Materializes, FX Slowly Departing from Risk Trends

GBPUSD Setup Never Materializes, FX Slowly Departing from Risk Trends

2011-05-26 20:55:00
John Kicklighter, Chief Currency Strategist
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My favored setup for the past 24 hour trading period never materialized. The short-term reversal potential on GBPUSD was was undermined by a sterling that has proven itself to be strong across the board. Considering my 1.6250 entry was never triggered, I've decided just to take off the order. What is the impetus for this continued run? Part of it has to do with risk appetite trends which have slowly advanced and thereby hurt the dollar overall (the currency is certainly prone after rallying for a near-month). At the same time, there are a number of instances of the more popular themes losing control over FX price action. Most notably, we have seen many pairs diverge or completely break from the path risk trends are carving. Is this a permanent shift? No. More likely, it is a divergence borne from the lack of momentum by the bigger themes (investor sentiment, Euro Zone financial health, US stimulus, etc).

...

For trades, I'm still long AUDNZD - though my stop should have been triggered. After the technical break it has seen; the setup doesn't look attractive now - though the fundamentals are certainly still askew. I'll keep that same stop (1.3065) in place and see if it stops out or finds its way back to fundamentals. A new trade today is reasonably risky and fades the prevailing fundamentals of the past few trading days. Short GBPCAD after its aggressive rally at a confluence of technical levels at 1.6035 plays to the potential that errant trends in the market will settle (if not reattach to the underlying themes) with the weekend fast approaching. The 150-point initial stop is necessary but the equivalent first target may very well carry the trade into the first half of next week.

...

Look across other setups I have been following, I have stayed away from the EURGBP break below 0.8665 and GBPJPY above 133 so far - though both are technically sound. I think the former pair is a better opportunity and am actively considering it as a partial offset to the short-sterling exposure on GBPCAD. Another couple setups that are immediately interesting are AUDUSD and NZDUSD. The Aussie dollar is at the top of a descending wedge at 1.0650 that could rebuff its advance if risk trends settle (or bleed through, if they don't). The kiwi dollar is stationed at its former swing high at 0.81 - I am not interested in fighting this trend nor joining it because the weakness of the US currency and dubious nature of the kiwi's advance. USDCAD looks very attractive; but the follow through seems to troubled. Still waiting on for breakouts on AUDJPY and CADJPY. EURCAD, AUDCAD and EURUSD will still take time yet to develop.

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