by Pinchas Cohen
The dollar is recuperating from yesterday’s drop, which was the hardest in three weeks. The Aussie dollar and British pound are the only two majors currently gaining strength against the dollar. The AUD is 0.35 percent higher and the GBP is 0.30 higher for the day.
The Australian dollar is showing signs of bottoming after a near 8 percent fall since September as it finds support on a long-term uptrend line since January 2016, so we'll focus on the pound after the Bank of England's policy meeting.
Why the BoE Will Remain In A Holding Period
While there is absolutely no expectation of a rate hike, the market is paying attention to comments on the pricing of two or more increases over the next three years. Though comments indicated that hikes will come gradually, it's more likely the BoE is in a holding period.
Policy officials are hoping to persuade markets that there are more increases in the pipeline. This has been their strategy to contain weakness in sterling. The weakness is the predominant reason for the overshoot of inflation last year. This constituted the bulk of the inflation margin over the 2 percent target of the November print of the 3.1 percent – the fastest pace of price growth in nearly six years – and a level which would require the governor to explain why the BoE is not doing more, if anything, to contain inflation.
Then again, it’s questionable whether the Bank can deliver more rate hikes. Although inflation might have peaked, it’s not likely to go down very rapidly. Yesterday's unemployment rate was reported at 4.3 percent, which is the lowest level in over four decades, yet wages fell by 0.4 percent, which is the eighth consecutive fall.
Meanwhile, unemployment is beginning to show cracks, as the number of people who are employed has declined for the second time in a row, this time by 56,000. Despite all the pessimism this signals, the pound is on the rise for unknown reasons. So let's not look a gift horse in the mouth. Should demand overcome supply, we would bet our money on another pound rally.
The pound shot up between November 28 and November 30 – almost 2.5 percent in only three days. Since then it has been ranging with a downward bias. This forms a bullish, falling flag, in which the 2.5 percent move forms the flag-pole and the range after that forms the flag.
The range that follows the sharp move is formed by profit-taking and traders taking time to work out whether the currency has run its course or whether the pound has another move up in store. An upside breakout signals an end to the interruption of the prevailing uptrend. The momentum-RSI, leading indicator (momentum creates price movement) has already provided an upside breakout to its downtrend of the same period of the flag.
Trading Strategies – Long Position
Conservative traders would not go long, until the uptrend is confirmed with a new peak, higher than the preceding September 20, 1.3658.
Moderate traders would wait for an upside breakout, followed by a return-move that confirms the integrity of the pattern, by rebounding higher than the last daily fall.
Aggressive traders may enter a long position upon a breakout. Depending on their resources and temperament, they may wish to wait for the return-move for a better-entry, to avoid the heart-problems of a whipsaw.
Capital management
Between a choice of superior analysis and mediocre capital management versus mediocre analysis and superior capital management, we put our money on the latter. Employing statistics correctly into a trading strategy may have a bigger effect than analysis, however good. The classic risk-reward ratio (how much a trader risks relative to his potential reward) is 1:3. That means – except for the cost of trading – it would require 3 losses to even out with a single win. When that equity management is executed successfully, a trader’s results would sky-rocket on the same quality of analysis.
Target: 300 pips
A flag’s implied target is measured by its flag-pole. The same psychology is presumed to also repeat itself, hence so is a similar rise, in price and time. However, a savvy trader knows it's critical to view the whole picture. The preceding, September 20 peak is presumed to provide a resistance at its price level of 1.3658. Therefore, while the overall pattern target is 300 pips from the point of breakout (if, for example, the breakout occurs when the pattern top is at 1.3500, the target would be 1.3800), a trader can also use the September 20 resistance of 1.3658 as a target. Whatever target a trader selects, it must be so after considering the risk-reward ratio to the stop-loss.
Stop-loss – the point of cutting losses
The stop-loss should be placed beneath the flag’s top, where it is presumed to provide support, as demand should overcome supply. Therefore, a price can’t be provided, as the angle changes daily. You can either use our chart, or simply trace the highs to form the flag top and the lows to form the flag bottom, although the top is the relevant one to find the correct price level for the stop-loss.