Major FX Pairs Remain Very Much Sideways, But Keep an Eye on the Pound
Eric Furstenberg • 4 min read
The pound sterling has taken quite a hammering in the last week. First, the BOE (Bank of England) cut their interest rate on Thursday, and at the same time increased their quantitative easing program with billions of GBP. The increased stimulus, and especially the size of the program, surprised the markets resulting in the GBP/USD losing more than 170 pips in less than 40 minutes. The BOE also promised more easing if it were necessary. The GBP/USD lost some further ground on Friday when the US nonfarm payrolls came out at a massive 255,000 new jobs created in July. Employment in the other sectors (e.g. private nonfarm payrolls and manufacturing payrolls) also beat expectations, and the unemployment rate (of the total work force combined) came in slightly weaker than expected. The impact on the FX market was immense dollar buying which was also felt in the GBP/USD exchange rate. The pair lost about 125 pips in 35 minutes. With all that said, let’s look at some charts.
GBP/USD Hourly Chart
As you can see, the short-term momentum on Cable is clearly bearish. Notice how the last few pullbacks to the 20 EMA provided very good opportunities to short the pair. Here you could have entered trades risking only a few pips to make plenty of pips. For example, if you placed sell limit orders on this moving average with a stop loss of 60 pips and a take profit of 120 pips, you would have made some handsome profits. Perhaps we might get some more opportunities like this in the week ahead.
If we look at the two red boxes in the chart above, we see long red candles and large moves in a very short time. This is what we call impulses or impulsive moves. Between these two boxes, we see a rather flat price action, which is known as a corrective move. A trader’s objective should be to trade in the direction of the impulsive moves. In this case, traders who were selling the pair were the ones who made money. Let’s look at a daily chart of the pair:
GBP/USD Daily Chart
As you can see, the two trading days marked in the chart above were strong bearish days with above average volume. As mentioned in previous articles, strong selling (coupled with high volume) could suggest that price might continue to move lower. This is one of the reasons I’m excited about selling Cable this week. Besides this, the fundamentals and other technicals also suggest that this pair may continue to trade lower. If we look at retail sentiment we see that retail traders are net long this pair, with 1.63 long positions for every short position at the moment. This is not very extreme, but it still suggests that from a sentiment perspective we might see a further decline in the pair. Remember that retail positioning is used as a contrarian indicator – when price is in a downtrend, the retail traders tend to buy. Conversely when the trend is up they tend to sell. Thus, they are usually on the losing side, with institutional traders normally positioned on the winning side. Retail traders like to fight trends which is very foolish indeed. So when we see that more retail traders are buying than selling like in this case, we could expect price to decline further. I prefer not to enter a trade on this pair right away, as I would rather wait for a better price to enter. For example, a pinbar rejection off of the 20 EMA on an hourly or 4-hour chart, or perhaps a couple of wicks penetrating the moving average but not closing on the other side of it. I also like to trade retracements to this exponential moving average if I see that the bounce (or the dip) is corrective in nature. Always be careful when the retracement is very impulsive, covering a lot of distance in a very short time. I like to see how price reacts to certain price levels and then enter a trade. Look at this example on the GBP/USD which occurred in April:
GBP/USD Hourly Chart (April 2016)
Here we see a beautiful sell setup on a 1-hour chart. A trader seeking a high probability short entry could have entered a trade after the second, third, fourth, fifth, sixth or even the seventh rejection off of the moving average, as price made as many as eight attempts to break through it. The trader could just have placed a sell entry on the 20 EMA after the preferred number of rejections off of it had taken place. This approach would have been very profitable on this day, as you can clearly see how price declined after being resisted by the 20 EMA.
Let’s briefly look at some other major pairs:
AUD/USD Daily Chart
Although the price is still supported by the 20 EMA, we might see a downward correction over the next few days. On Friday, we saw broad USD strength stepping in with the NFP’s beating expectations by far. We might see a continuation of this strength into the new week which might bring the Aussie down somewhat. I am not very excited about trading this pair right now, as it is pretty range-bound at the moment.
EUR/USD Daily Chart
As you can see this pair is also trading sideways. Not very exciting either. It should be noted, however, that price could not close below the 200-day moving average on Friday. However, I suspect that we might see some more dollar strength against the Euro going into the new week, which might push the pair through this moving average.
USD/CHF Daily Chart
I like the rejection off of the fib level as shown above. The price might meet some further resistance at this level, or perhaps even a bit higher in the region of the 200-day moving average (the green moving average). I would like to see some wicks on an hourly or 4-hour chart rejecting off of these levels, to indicate that there are sellers protecting it. Perhaps we can get a good opportunity to short the pair in the next few days.
Other things to consider
Furthermore, we have a lot of important economic data releases out of China this week. The most important event to watch tomorrow is probably the Chinese trade balance figures that are released at 03:00 GMT.
As mentioned earlier in this article, we could perhaps kick off the week with some more USD strength.
Just a special note on the USD/JPY – retail sentiment is pretty extreme with retail traders being net long this pair. Currently, there are 3.99 traders that are long for every trader that is short. Perhaps we could see an aggressive decline in this pair soon.
Good luck trading!