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Potentially Unfavorable Brexit Negotiations May Pave the Way for Cables Next Drop

Potentially Unfavorable Brexit Negotiations May Pave the Way for Cables Next Drop

2016-10-03 16:10:00
Tyler Yell, CMT, Currency Strategist
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Bias: Bearish Cable

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Point to Establish Short Exposure: Limit Entry Sell Near 1.2980

Spot: 1.2843

Target 1: 1.2788 2016 Low

Target 2: 1.2646 1.382% Fibonacci Extension of Aug-Sept. Range

Invalidation Level: Close above Late September Weekly High 1.3057

Fundamental & Technical Focus

Here is why a Cable short is looking more attractive than usual to me even near new multi-decade lows. The first trading day of October brought news about Theresa May, PM of the United Kingdom setting a date for the release of Article 50, which will initiate two years of discussions the UK’s exit from the European Union.

The Article 50 release date was set for Q1 2017, but there is sufficient fear that there will be unfavorable negotiations in such a short time that could place the UK with limited access to the EU’s single market. Another point that put the finger on the ‘sell’ button of GBP bulls was Theresa May saying that they will curb immigration.

Monday’s ISM number that beat estimates have pushed the expectations of a December rate hike higher, but the US Dollar is not the focal point of this trade. Hoping for US Dollar strength to be self-sustaining has seemed a fool’s errand since the major dollar rally ended in March ’15. However, even a steady USD, which according to the balance of economic data surprises and disappointments could remain may be enough to put pressure against sterling.

Cable May Be Testing New Downside Before Another Run Lower

Potentially Unfavorable Brexit Negotiations May Pave the Way for Cables Next Drop

Chart Source: TradingView.com, Created by Tyler Yell, CMT

Key Technical Levels:

GBP/USD – Nearing Three-Decade Low as May Sets, Sets Sights on July Lows at 1.27886

2nd Resistance: 1.3057 Weekly High of Late September

1st Resistance: 1.2907 Friday Close

Spot: 1.28326

1st support: 1.27886 July Low

2nd support: 1.2643, 138.2% Fibonacci retracement of Aug. 15-Sept. 6 advance

Trade Setup:

I am looking to sell GBPUSD with a limit order on the intra-week strength that is not expected to last. The weekly pivot for the first week of October sits at 1.2981, and a move to that level could provide an attractive level to sell toward an extension to the downside. Given that markets are now nearing 3-decade lows, Fibonacci extensions are the tool-du-jour to decide what targets unless you desire to hold onto the trade in hope for a larger move down.

Given the move lower on RSI(5), now would likely be an expensive time to act on the trend, as the market has

Once triggered, A trailing stop would be used above an opposing up-fractal currently at 1.3057 Weekly High of late September on the daily chart. Entering this trade in the manner described above aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

The eventual target is the 138.2% Fibonacci retracement of Aug. 15-Sept. 6 advance that sits at 1.2643.

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