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Bullish GBP/CAD on Weakening CA Fundamentals, Technical Bullish Developments

Bullish GBP/CAD on Weakening CA Fundamentals, Technical Bullish Developments

2018-10-09 16:32:00
Tyler Yell, CMT, Currency Strategist
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The BIG Idea on Bullish GBP/CAD:

GBPCAD has moved to the bottom of a rising channel with bullish momentum divergence, and Ichimoku can be looked to as a trigger that the technical odds are shifting in Bull’s favor.

  • Point to Establish Long Exposure: Break & close above impulse kick-off high at 1.7205
  • Spot: C$1.7205 per GBP
  • Target 1: C$1.7750 per GBP (lower high in June,) > 1:1 Risk: Reward Ratio
  • Target 2: C$1.8500 per GBP (touch above YTD high,)1:4.25 Risk: Reward Ratio
  • Invalidation Level: C$1.6900 per GBP (50% retracement of recent bounce,) 305 pip stop

Are Q4 Currency Forecasts are fresh, grab them for FREE here

Trade Structure For Entry Order on GBP/CAD

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The BIG Picture:

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Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT

What Are the Charts Saying for GBP/CAD?

The chart above is busy, but the key takeaway is that GBPCAD has moved aggressively off C$1.6600 per GBP after what could be a false break lower of a trendline drawn from the 2016-2017 lows.

As a trend following trading, I’m not going to buy a low. Instead, I’m looking for some proof that the market is biting on my idea, and that would come on a break above the September 27 high at C$1.7205.

The targets for this trade sit at the June high, and subsequently above the YTD high. The invalidation comes at C$1.6900, which would be the 50% retracement of the August-September range.

The chart above has a handful of indicators, so let’s walk through them to discuss what they may be saying. First, and foremost, Ichimoku cloud is showing the potential workings of a bullish reversal, which this trade idea is predicated upon as price is attempting to break above the cloud. Once the price is above the close, traders who utilize Ichimoku will look to the lagging line (bright green) to show momentum has shifted in favor of upside.

Pound Sterling and the Canadian Dollar are unique in that the last three momentum breakouts above or below the cloud have carried the currency 1,000+ pips in Q4 2017, 1,900+ pips in Q1 2018, and 1,200 pips in Q2-Q3 2018. Therefore, while the targets may seem aggressive, a trader with appropriate position sizing and a long enough time horizon could find this trade worthwhile.

Helping to support this view that we could see bullish momentum per MACD (5, 34, 5.) The adjusted settings show bullish divergence and a recent move into positive territory. A break above the late September high through C$1.7205 may have followed through, which this trade depends on if it is to work.

The last tool on the chart is the Fibonacci Channel, which was drawn off the troughs of perceived corrective waves a and c, and extended from the terminus of wave b. If you’d like a thorough understanding of Elliott Wave, make sure to check out our Head Trading Instructor, Jeremy Wagner’s articles. The Fib channel shows the potential triple bottom at C$1.66 happened in the 38.2-61.8% zone of the Fib channel, and a subsequent breakout above the channel would further add to my bullish conviction that we could retrace the move back to the June or YTD high.

Piecing Together Fundamental Developments Supporting This Trade

A confusion among FX traders who look to fundamentals for insight is knowing where exactly to look. The supporting fundamentals for a currency far surpass that of commodities, equities, or even bonds. While economic data in Canada has been beating economist forecasts, the terms of trade have continued to deteriorate, and have recently hit the worst levels of the year.

What’s more, last month, U.K.'s terms of trade have recently surged to most favorablelevel in history.

Given that GBP/CAD is trading within 3% of YTD lows, a sharp move higher on CAD weakness could result. Of course, any GBP bear will point to Brexit as the reason a bullish trade won’t work out, and they’re right to do so. However, political outcomes have persistently been a poor predictor of market returns. On Tuesday, the WSJ reported that ‘EU, UK Divorce Terms Could Be Settled by Monday (October 15.)’

Naturally, markets tend to discount the unknown, and that has absolutely weighed on sterling. Any firm understanding of the future could help point the way higher for sterling as traders at least know what to price in moving forward.

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---Written by Tyler Yell, CMT

Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.

Talk markets on twitter @ForexYell

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

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