The BoE will announce their interest rate decision on Thursday but a hike is not expected for now, with inflation well below its target and the committee standing at 9-0 on a “no hike”. The FED on the other hand stated last week that the timeline of any rate increase would depend on economic data. This was widely seen as somewhat hawkish and a rate hike by the FED is now expected around the summer. The interest rate differential will continue to create selling pressure here, so even though the GBP is not considered a weak currency, I am bearish on this pair.
On the technical side, it has been ranging in a precise 290 pip wide bearish parallel channel on the hourly for the last 28 days. We can now see the contour of a 5-point extension structure taking shape: a bullish Butterfly pattern. The price did pass the B point and then retraced back up, but the hidden bearish RSI divergence, normally found during retracements in a downtrend, indicates this butterfly might be heading for completion. With that it became a trade candidate and earned a place on my watchlist. I defined the potential reversal zone (PRZ) for this Butterfly pattern, by charting the projection of three harmonic levels. I: the 1272 expansion of XA, II: an AB = CD pattern and III: the 2618 BC expansion. This defines a clear 28 pips wide zone, represented by the orange lines in the chart.
Should price action test the PRZ, stabilise and reverse convincingly, I would enter long in spite of the bearish trend. I am simply playing a pattern recognition probability game and harmonics are a high probability reason to enter a trade. There is a 4H support zone from 2013 near this area, increasing the edge of a reversal in case of completion of the pattern. SL goes 10 pips behind the next support level (which is daily support). TP1 = 382 retracement of AD and TP2 = 618 retracement of AD.
There are 215 pips to be gained and the trade has a reward – risk ratio of 2.8!
UPDATE: Price action for this trade candidate did not test the PRZ and never gave an entry signal so I did not enter. On to the next trade.
On the technical side, it has been ranging in a precise 290 pip wide bearish parallel channel on the hourly for the last 28 days. We can now see the contour of a 5-point extension structure taking shape: a bullish Butterfly pattern. The price did pass the B point and then retraced back up, but the hidden bearish RSI divergence, normally found during retracements in a downtrend, indicates this butterfly might be heading for completion. With that it became a trade candidate and earned a place on my watchlist. I defined the potential reversal zone (PRZ) for this Butterfly pattern, by charting the projection of three harmonic levels. I: the 1272 expansion of XA, II: an AB = CD pattern and III: the 2618 BC expansion. This defines a clear 28 pips wide zone, represented by the orange lines in the chart.
Should price action test the PRZ, stabilise and reverse convincingly, I would enter long in spite of the bearish trend. I am simply playing a pattern recognition probability game and harmonics are a high probability reason to enter a trade. There is a 4H support zone from 2013 near this area, increasing the edge of a reversal in case of completion of the pattern. SL goes 10 pips behind the next support level (which is daily support). TP1 = 382 retracement of AD and TP2 = 618 retracement of AD.
There are 215 pips to be gained and the trade has a reward – risk ratio of 2.8!
UPDATE: Price action for this trade candidate did not test the PRZ and never gave an entry signal so I did not enter. On to the next trade.
You don´t need to be a weatherman to know which way the wind blows - B. Dylan