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Pound Trade Setups Should Be Watched Closely

Pound Trade Setups Should Be Watched Closely

John Kicklighter, Chief Strategist

The pound is facing immediate volatility risk. For existing sterling exposure, moving up stops or cutting risky positions is a risk-minded move. I have trailed down the stop on my GBPAUD short for that reason.

At the same time, this event risk proffers a serious opportunity. Certainly there is a lot of volatiltiy potential, but my interest is in the fundamental depth the BoE Quarterly Inflation report represents (see my Strategy Video on this event and its trade potential). For an outcome that disappoints high interest rate expectations, my preference for a sterling tumble would be GBPUSD on a break below 1.6750. Should the BoE live up to or beat the hawkish bearing - very difficult to do - I like EURGBP extending its tumble below 0.8150.

A little further out, we have US CPI and Eurozone GDP figures due on Thursday. That impending event risk led me to question the potential in the EURUSD's break below 1.3750 this past session. However, we would need to see a substantial beat for European growth figures and disappointment in inflation to knock the ECB off its stimulus track and US off of Taper. As such, I decided to take a half-size short at 1.3717 with a stop of a little over 100 pips. If the data passes and the former channel support still stand as resistance, I'll build the position.

The euro's medium-term outlook has certainly taken a turn for the worse - and the market seems to be moving proactively on the shift as there is considerable premium to be unwound. Even as a passive flow, when paired against the withdrawn support underneath the yen crosses in the form of the BoJ's write off of a stimulus upgrade, I'm liking EURJPY a distinct trade candidate even before a risk aversion trend builds. I'm watching 140 and will consider the scenarios should we break that floor.

As for my other trades, I still have my EURAUD short, USDCHF long-term long and AUDNZD long-term long.

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