There are a multitude of great forex trades available in 2016, but the best forex trade of 2016 is buying GBP/USD post-Brexit.
GBP/USD (and, well, pretty much GBP/Anything) collapsed immediately in the wake of the United Kingdom’s decision to leave the European Union, sinking to lows against the U.S. dollar not seen in years, around the 1.30000 level. However, the gloom and doom forecasts for the post-Brexit U.K. economy have been vastly overblown.
Recent economic statistics for the U.K. economy have not even remotely signaled some horrific recession for the country. In July, U.K. retail sales showed nearly a 6% increase year-over-year from 2015 numbers, continuing a firm uptrend that has been in place since 2013. In August, the services sector in the U.K., which accounts for approximately 80% of the country’s total economy, enjoyed a record gain. Also in August, U.K. manufacturing grew at its fastest rate in 17 years. And a, for the moment, depressed British pound should boost U.K. tourism.
You needn’t memorize or even minutely follow U.K. economic statistics though. All you really need to do is keep in mind some very fundamental historical facts – Like the fact that the U.K. was, with the possible exception of Germany, the strongest European economy before it ever joined the European Union, and it remains the strongest single country European economy after leaving the EU (again, with the possible exception of Germany). A report by the major U.K. accounting firm, PricewaterhouseCoopers, that ranks the world’s leading cities as prime business centers, ranked London #1 for the second year in a row, ahead of even economic boom towns such as Singapore and Hong Kong.
The reason GBP dropped approximately 15% against the U.S. dollar and about 12% against the euro in the aftermath of the Brexit vote is a very simple one, explained by a trading adage centuries old: Financial markets do not like uncertainty. And exactly how everything shakes out for the U.K. post-Brexit is indeed uncertain, at least as far as the details. However, again it’s important to look at the broader picture in light of basic economic fundamentals. The U.K. will continue to be a major provider of products and services to all of the countries that it previously had an established trading relationship with. Neither HSBC nor Barclays Bank is going out of business. London will continue its position as a major financial trading center, and the UK economy will continue to outperform other European economies.
In short, GBP/USD down anywhere close to 1.3000 is an extraordinary buying opportunity. It got slammed in June, but over the past two months, it hasn’t been pushed any lower than the initial blowout in the two weeks immediately following the Brexit vote.
Let’s look at it technically now for possible entry points. One possible scenario is that it’s languishing down around that 1.3000 level, but then takes off to the upside when and if the Fed announces Wednesday that it’s not raising interest rates right now. I consider a pre-election interest rate increase more unlikely than likely.
On an hourly chart, we can see it bouncing from support:
Here’s the 4hr Look:
Three Buying Strategies:
1. FOMC Gambler’s Trade
As I’ve pointed out, I think it is a strong possibility that the rate will not go up.
Because of this, we are expecting the GBP/USD to rise significantly based on that announcement.
If you have the guts to gamble, you can take a long right before the announcement (keep an eye on spreads) and give price the opportunity to sky-rocket.
The GBP is notorious for shaking people out of trades before making its final move, so you’ll need a large stop loss to make this strategy work. I recommend a stop of 75 – 100 pips.
2. The Patient Player
For those that prefer confirmation, it’s a much simpler strategy. We’ll simply wait for the news to come out and give it some time to make up its mind. Then, based on a positive (Bullish) confirmation 4Hr candle close above the 10ema, we can buy into the pair.
For this strategy, we’d place a stop several pips below the low of the day and be patient as the price looks to make a move toward higher prices.
3. Small Scale In
If you want to keep your risk small, you can buy at various points with very small size and keep your stop loss wide.
You can begin by placing a small position before the announcement. If price moves down, look to add an additional position every 50 pips it moves lower until a total of 4 positions have been added and price has covered about 150 pips. Again, each position should be small with limited risk.
With this approach, your max stop should be 240-280 pips giving yourself plenty of room for the market to attempt to shake out the average buyer before a reversal.
Now, what about profit target points? – There are several:
- the daily close gap left from 1.3636 on June 24th
- halfway back to 1.5000, which would be around 1.4000, although I think 1.4500-1.4600 might be a more likely stopping point
- a weekly gap from around 1.6300 that dates back to August of 2014
- halfway back to its 2007 high around 2.1100, which would hit around 1.7000
- somewhere above 2.1000 (not so likely, but you never know)
Personally, I’m planning to hang to at least see a test of the 1.5000 level, and honestly expect it to approach closer to at least 1.6000.
Thanks for reading and I hope this helps!