Yesterday we posted a couple of articles on price action. I know you can find many articles in the forex textbooks which try to explain in theory how to read and trade the price action, but the real trading is much different. That´s why we started what we call "FXML series on price action", which are short updates with explanations on how to read price action in real market conditions and then apply it to live trading with the help of fundamental and technical indicators.
After the first two examples yesterday we´ll have a look at GBP/USD. This forex pair has been in demand after the positive economic data from the UK since mid-August. But, after topping out at 1.3445 the price has fallen about 300 pips. Not even the dovish comments from Brainard couldn´t stop the decline.
The interest rate hike odds for September have declined to less than 25% after Brainard. That is the red line for asset managers who manage millions and billions worth of assets/investments. They don´t bet on a currency (the USD in this case) when the odds of a rate hike are below 25%, so this must be a USD negative.
But the British Pound has lost ground against the Buck and GBP/USD is going down as fast as it went up. What does that tell you about this forex pair?
That tells us that after the Brexit vote, when it comes to the GBP the forex market doesn´t really care for other central banks besides the BOE (Bank of England). Right now, the market feels Brexit is too big an event for the GBP and the future is extremely uncertain, so whatever the FED plans are, the GBP is extremely vulnerable to the domestic scene.
The 200 pip fall after yesterday´s inflationary report and the 100 decline today, even though Brainard slashed the rate hike odds, shows that the 1.3450 – 1.3550 level is too much for the GBP lovers. Even the good economic data from the UK can´t convince them to keep their long positions in this forex pair.
The GBP/USD bulls don´t know what Brexit might bring next. There might be all sorts of horrible surprises coming up. Adding to that, the global economic situation, the fear trade which might kick in at any time and the possibility of the FED hiking rates pose high risks for these.
So, the 1.3450 – 1.3550 level has turned into a good place to sell this forex pair, which offers a good risk/reward ratio. The price quickly turns down when it reaches that area. That means that no one has the guts to hold the buy positions and almost everyone rushes to sell at these levels. That sort of price action screams sell when the price gets there. We hesitated to open a long term sell forex signal last week when the price reached 1.3445, that the price action did its job and if we get back up there again we will reconsider doing so.