The GBP/USD has been trending higher now for over 12 months, dating back to the May 21st low of 2010 at 1.4226. Since last May the pair has moved as much as 17% higher, currently toping at 1.6745 on April 28th of this year. Price is currently creating a third test of support of our trend line, opening up the potential for future buying opportunities with new highs. A break below however, would have bearish implications for the pair concluding the current bull run.
The current dynamics of the GBP/USD are coming directly from the monetary policy decisions made on Threadneedle Street, London. The BOE (Bank of England) is maintaining a wait and see mentality in regards to fighting inflation. Previously the Policy Committee voted 6-3 to keep rates steady at 0.50% on fears that a hike may unnecessarily slow economic growth. The next event to give us insight into the UK recovery will be GDP numbers on Wednesday May the 25th. Growth in this number may reveal inflationary pressures that may be the final straw before a monetary policy shift from the BOE.
Price Action
Taking price in to a 4Hr chart we can see price testing our 78.6% retracement line at 1.6112. The 78.6% Fibonacci Line is often referred to as the “Fibonacci Line of last resort”. It may seem counter intuitive at first to buy at this level after such a decrease in price over the last month. However, the 78.6% allows us to trade with defined risk and optimal reward settings. If fails to bounce off support, we can reasonably expect a test of the prior low. This can be used when placing our stop orders. Once our stop distance is found, we can optimize our profit potential as high as our last high created on April 28th.
Trading Opportunity
My preference is to buy the GBP/USD near the 78.6% line at 1.6112. Stops should be set under the 78.6% line near the previous low established at 1.5937. Using a 1:2 risk reward ratio, we should be looking for a minimum 350 pips in profit on the trade. This would set our limit at our 38.2 line at 1.6430.
Alternative scenarios include sellers waiting for a new low and placing entrys under 1.5937 in case of a breakout scenario.
Walker England contributes to the Instructor Trading Tips articles. To receive more timely notifications on his reports, email instructor@dailyfx.com to be added to the distribution list.
