On Wednesday, I covered how I am playing the GBP/USD trades and set myself an initial target at the 1.45 area. I wrote: “That brings up the possibility that the current bounce could extend much further than my initial 1.45 target.”
I also left you with this cryptic line: “This could get interesting!”
In fact, interesting was hardly the word when, on Wednesday, the market roared up by around two cents on the day as dollar selling became brutal – and gave a major shock to the army of dollar bulls.
None of my readers should have been surprised by this. I have emphasised how over-loved the US dollar has become. Just about everyone has become convinced the dollar will continue to grow in strength as the currency wars heat up.
Central banks are falling over themselves, not only to keep interest rates super-low but to introduce negative rates (NIRP) to deter cash-hoarding by commercial banks. They believe negative rates will spur commercial lending, and hence lift consumer prices out of the “danger zone” of deflation.
The Bank of England yesterday is only the latest central bank to talk rates down for longer. Also, the list of central banks with NIRP is growing. And the US Federal Reserve’s maverick move in December, where they actually raised the Fed Funds target rate by 0.5%, sticks out like a sore thumb.
By conventional yardsticks, this divergence between the Bank of England and the Fed should result in a weaker GBP and a stronger USD. So why did I forecast just the opposite?
The answer in three words: the wave pattern. And the fact that the dollar has become dangerously over-loved in recent weeks. You can hardly find a pundit (except for the perennial “dollar doomsters”) who is bearish the dollar.
And that scenario is meat and drink for contrarian traders, such as myself.
When we start trading, we are told that the trend is your friend. And that is true – provided you can hop on board at an early stage and then stay on board for the duration.
And where do the great trends start that can offer you these major wins? Of course, near the reversal of the previous trend. The earlier you can identify a major trend change, the bigger your profits. It’s that simple.
With this week’s strong rally, where do I now expect the rally to at least pause? My top candidates for an upside target is either the Fibonacci 50% or 62% retraces of the previous big wave. That is my default position in all cases.
Here is the current hourly chart:
And right on cue, the rally has stopped right at the Fibonacci 50% level around 1.4650. Because I had drawn in these Fibonacci levels well beforehand, I was able to set up my profit-taking trades at my leisure.
It was a beautiful sight watching the market rise up to meet my new target yesterday. My long trade taken at the 1.42 level resulted in a 450 pips profit. And with my initial loss of 40 pips on my second trade, I ended up with a net win of 410 pips.
Now, I have a potential top to wave C/wave 4 and I can contemplate a short trade to take advantage of the likely downtrend.
I was right – it is certainly getting interesting!