GBP/USD – Short Trade Idea. Price Action Defying Fundamentals
- GBP/USD rallied sharply towards the upside on USD weakness
- Fundamentals still weight heavy on prices
- Market may be overly optimistic on reopening of economies
Prices rallied over 100 pips to 1.23600 before retreating. This move comes as the dollar index fell sharply from around 99.72 to 99.00 on improved risk appetite.
As evident in the chart above prices are currently breaking bellow a small rising channel. This could be the corrective structure required for lower prices , the previous candle on the 1 hour timeframe closed as a bearish doji, further supporting downside to come.
Prices however need to break below the 8-day EMA and 800-day EMA at 1.23266 to see bearish momentum picking up. Moreover a key weekly support zone at 1.23070 needs to be broken before prices can reverse its upside rally.
As mentioned above, the dollar index fell on improved risk appetite.
This increased appetite comes as global economies have began reopen their respective economies, and reducing restrictions. However it appears the market seems to be overly ‘optimistic’.
The economic impact of COVID-19 has been immense and we’re far from seeing the light at the end of the tunnel. High volume quantitative easing, asset purchasing, interest rates slashing and extended credit terms has lead to government debt rising by 40-50% alone. It is likely global economies will recover however it will take a considerable amount of time to fully recover.
Outside of COVID-19. There are also 2 significant events weighing on this pair:
1 – US & China Tensions: Rising tensions between the US and China is likely to result in USD buying, as a global safe haven. China have recently said it will prepare a countermeasure against the recent actions undertaken by the US administration such as the banning of global chips to Huawei. It is likely tensions will further heighten.
2 – Brexit: The UK & EU have not made any significant progress on a Brexit trade deal. Every week that passes, is a week closer to the deadline by the year-end and thus a greater risk of a no-deal scenario. The potential impact on the UK economy would be detrimental, as the effect of COVID-19 on the economy would be multiplied, spelling a rather uncertain future for businesses and consumers in the UK.
Potential Entry: When/If prices close below the weekly support zone at 1.23070.
Potential Stops: At around 1.23246
This trade carries a risk to reward ratio of 2.00. with a maximum potential loss of 26 pips and a maximum potential gain of 52 pips. We strongly advise you place stop losses at entry once a trade is at least 15 pips in profit.
- Prices were able to meet TP1, TP2 and TP3 generating +52 pips, upon closing below the purple highlighted zone. Note that there was multiple attempts of prices trying to close below this zone however was not able to close, thus invalidating a trade entry. It is therefore important to wait for the advised confirmation before entering a trade even if the entry price has been met.