GBPUSD: THE RUN DOWN & HOW TO TRADE - FOMC & UK EU REFERENDUM 2
Updated
I suggest you check out ALL of the relevant articles that i attach to this post so that this post makes sense
SEE PART 1 ALSO
GBPUSD historical Price Action
The findings of previous the attached "Price action history posts" led to the conclusion that referendum history clearly wasn't repeating itself however IMO because this is the case it has opened up massive opportunities - for example;
- Price Action for the SUR sold off a massive 1000pips 8 weeks before the vote, then recovered 400pips 2wks leading into the vote in 2014 - such price action didnt present much trading opportunity since the risks were priced so early, many retail investors missed the big move and probably made heavy losses by shorting in the 2wks into the event when the market actually rose.
- HOWEVER, the market for the UER has been trading sideways/ directionless (with a slight upwards bias) for over 16wks only gaining from 1.41-1.45, with many candles failing to hold onto their extreme high/lows - simply open-close at median levels which further confirms the lack of conviction; this has meant that GU now trades considerably ABOVE lows at 1.38 which means there is clear room for a down trend to emerge and thus we can be confident/ safe in taking SHORTS on the pair at levels signif above the 1.38, as we can assume that the market will seek out the recent 1.38 lows if a downtrend does emerge - theres a clear and nearby target for a downtrend.
Fundamentals and Summary
- FOMC has started its hike cycle, GU is extremely sensitive to US rates and shed well over 1000pips in the run up and after the December FOMC meeting (compared to the EURO who still trades above hike levels). Thus we can assume that future rate increases, or the speculation that they will increase, will continue to price GU lower.
The UK BOE isnt likely to raise Rates until late 2017/2018 as our economy (CPI 0.3% vs US 1.1%/ Core 1.2% vs US 2.1%), thus this Monetary Policy divergence theme is likely to continue for sometime, consequently devaluing GBP consistently lower and lower in the future, as it has done before, which gives me confidence in this part of the trade.
Furthermore, in the short term the UK EU Referendum will serve as uncertainty that will undoubtably drive GU down in the near term - regardless of the result as the uncertainty WILL drive rational investors from holding sterling.
-I like being short sterling over the short and long term as the CB Policy divergence, imo, will serve as a consistent underlying seller of GBP over the next 1/2 years whilst the UK EU Ref provides us near term downside pressure.
ALSO, being short sterling into the Ref and into future FOMC meetings means you benefit from the carry of the "event tail risks" e.g. you are positively exposed to any probabilisticly unlikely, but possible, events - which would be extremely profitable e.g. if UK vote to leave EU you have downside already placed on GBP or if FOMC steepen the hiking curve we are positioned to benefit.
- As discussed earlier, over the weekend i thought using CHF or JPY to combine with short GBP or EUR may be effective as 1. CHF and JPY both havent priced lower as heavily as USD (relatively more downside value available). 2. By being long CHF/JPY on the basis of being short GBP because of Brexit risks, you are able to hold the risk-off assets which make the trade 2-way e.g. you collect the GBP Brexit uncertainty selling AND the JPY/CHF buying as investors flee to safety - such 2-way trades create exponentially more downside momentum since you have TWO drivers.
TRADING STRATEGY: SELL/ FADE ANY PULL BACKS IN A PYRAMID e.g. 3@1.450, 2@1.445 & 1@1.44!
SL: 1.48 - holding until June 23/24th, or 27th of July for all 2 X FOMC and the BREXIT REF event volatility carry
TP: Fed hike = <1.38; Fed Hawk = 1.40; Brexit uncertainty = <1.40; Brexit YES = < 1.345. Brexit & Hike = <1.30
SEE PART 1 ALSO
GBPUSD historical Price Action
The findings of previous the attached "Price action history posts" led to the conclusion that referendum history clearly wasn't repeating itself however IMO because this is the case it has opened up massive opportunities - for example;
- Price Action for the SUR sold off a massive 1000pips 8 weeks before the vote, then recovered 400pips 2wks leading into the vote in 2014 - such price action didnt present much trading opportunity since the risks were priced so early, many retail investors missed the big move and probably made heavy losses by shorting in the 2wks into the event when the market actually rose.
- HOWEVER, the market for the UER has been trading sideways/ directionless (with a slight upwards bias) for over 16wks only gaining from 1.41-1.45, with many candles failing to hold onto their extreme high/lows - simply open-close at median levels which further confirms the lack of conviction; this has meant that GU now trades considerably ABOVE lows at 1.38 which means there is clear room for a down trend to emerge and thus we can be confident/ safe in taking SHORTS on the pair at levels signif above the 1.38, as we can assume that the market will seek out the recent 1.38 lows if a downtrend does emerge - theres a clear and nearby target for a downtrend.
Fundamentals and Summary
- FOMC has started its hike cycle, GU is extremely sensitive to US rates and shed well over 1000pips in the run up and after the December FOMC meeting (compared to the EURO who still trades above hike levels). Thus we can assume that future rate increases, or the speculation that they will increase, will continue to price GU lower.
The UK BOE isnt likely to raise Rates until late 2017/2018 as our economy (CPI 0.3% vs US 1.1%/ Core 1.2% vs US 2.1%), thus this Monetary Policy divergence theme is likely to continue for sometime, consequently devaluing GBP consistently lower and lower in the future, as it has done before, which gives me confidence in this part of the trade.
Furthermore, in the short term the UK EU Referendum will serve as uncertainty that will undoubtably drive GU down in the near term - regardless of the result as the uncertainty WILL drive rational investors from holding sterling.
-I like being short sterling over the short and long term as the CB Policy divergence, imo, will serve as a consistent underlying seller of GBP over the next 1/2 years whilst the UK EU Ref provides us near term downside pressure.
ALSO, being short sterling into the Ref and into future FOMC meetings means you benefit from the carry of the "event tail risks" e.g. you are positively exposed to any probabilisticly unlikely, but possible, events - which would be extremely profitable e.g. if UK vote to leave EU you have downside already placed on GBP or if FOMC steepen the hiking curve we are positioned to benefit.
- As discussed earlier, over the weekend i thought using CHF or JPY to combine with short GBP or EUR may be effective as 1. CHF and JPY both havent priced lower as heavily as USD (relatively more downside value available). 2. By being long CHF/JPY on the basis of being short GBP because of Brexit risks, you are able to hold the risk-off assets which make the trade 2-way e.g. you collect the GBP Brexit uncertainty selling AND the JPY/CHF buying as investors flee to safety - such 2-way trades create exponentially more downside momentum since you have TWO drivers.
TRADING STRATEGY: SELL/ FADE ANY PULL BACKS IN A PYRAMID e.g. 3@1.450, 2@1.445 & 1@1.44!
SL: 1.48 - holding until June 23/24th, or 27th of July for all 2 X FOMC and the BREXIT REF event volatility carry
TP: Fed hike = <1.38; Fed Hawk = 1.40; Brexit uncertainty = <1.40; Brexit YES = < 1.345. Brexit & Hike = <1.30
Note
*Please look out for my GBP EUR vs CHF USD JPY relative price analysis posts that i will post several times a day which will tell you which crosses are relatively trading the cheapest to long/ short so you can get the cheapest price for a particular expression.Questions, comments and feedback - welcome!
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