The latest Bank of England monetary policy statement set Sterling on fire today, pushing the pound lower against the major currencies.
GBP/CAD is notable among the group as the chart points to a potential technical setup that may draw in longer-term traders.
Consolidation Break on GBP/CAD?
There were high expectations that the Bank of England would tighten monetary policy at today’s meeting and statement, but it looks like the BOE disappointed the market by holding off on changes for now. The vote to hold interest rates at 0.10% came in at 7-2, while we saw a vote of 6-3 to hold the bond purchasing program at £875 billion ($1.2 trillion). Corporate bond purchases also remained the same at £20 billion.
The British pound sold off quickly after the event and at the moment, traders don’t seem to keen to fade the move just yet. That makes consolidation break setups like the one we see in GBP/CAD ones to watch for a potential trade as this setup may attract both players from both fundamental and technical camps.
We think GBP/CAD leads the pack as the Bank of Canada recently ended bond purchases and pushed up expectations of a rate hike during last week’s monetary policy statement, making the Loonie a potential top draw for fundamental traders among the major currencies for now. With this fundamental dynamic in play, odds are pretty good that the Loonie may outperform Sterling in both the short and longer-term time frames.
So, today’s break lower from the range roughly between 1.6900 – 1.7050 has good odds of being a legit break, and traders may want to consider a short position if these themes and drivers hold. After a strong 100 pip drop, though, it may make sense to hold off for a pullback, possibly to the broken lows around 1.6900 before building out the plan.
Of course, some traders may be worried they may miss a potential move lower by waiting for better prices, at which point, scaling in techniques should be considered to balance the risk of missing the move vs. entering at an unfavorable price.
Now, there is some risk that a technical bounce, or even some choppiness, may be in the cards as the 1.6800 handle is a major support are on the longer-term time frame going all the way back through 2020. For those looking to short, keep this in mind and keep your risk small until the market clearly breaks this area.
And for those bullish on GBP/CAD for technical reasons, you may be able to build a low risk/high return trade with a tight stop below 1.6800 and target the top of the range around 1.7500.
What do you guys think? Is this a legit break lower or will buyers jump in to fade both the longer-term downtrend and the pop lower?
Let me know in the comments below, and as always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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