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Over the past three weeks, GBPAUD has cut a very stable and wide range. What’s more, the pair closed the week just as the bottom of the recent congestion zone. However, this setup comes with a very big risk disclaimer.

Why Would GBPAUD Stay in a Range?   ·         Levels to Watch: -Range Top:       1.1490 (Fib, Pivot) -Range Bottom: 1.1125 (Fib, SMA, Pivot, Trend)   ·         A GBPAUD is very clear, but also quite dangerous. Aside from the fact that this pair is still seeing levels of volatility that are extreme on a historical basis, we are also looking at a very unstable fundamental backdrop. Overall, the panic that accompanied threats of a deteriorating financial system has settled; but now the markets are adjusting forecasts surrounding the severity of the two countries respective recession and the pace at which the BoE and RBA will continue to lower their interest rates.   ·         From the chart itself, the range is rather blatant. A 61.8% retracement of the Oct.1st to 8th advance has coincided to a congestion level to create a nice floor around 2.4000. There are many levels of resistance, on the other hand. The last swing high at 2.60 is preceded by fibs at 2.4650 and 2.5235. Suggested Strategy   ·         Long: Entry orders will be set at 2.4125 – a reasonable level considering Friday’s close.   ·         Stop: The initial stop for both lots will be set at 2.3950 below the rising trend and horizontal support. To secure profit, the second lot stop will be at breakeven after first target hits. ·         Target: The first objective equals risk (175) at 2.4300. The second target will be 2.4500.

Trading Tip – Over the past three weeks, GBPAUD has cut a very stable and wide range. What’s more, the pair closed the week just as the bottom of the recent congestion zone. However, this setup comes with a very big risk disclaimer. While the range has stood up very well for most of the past month, volatility for GBPAUD has been extraordinary. This means, a breakout is a very high risk probability. It is very important for this strategy to play it to scale. It is essential to reduce position size to a half or third of what the usual risk per trade is to account for the sheer activity of this pair. A cautious approach would to reduce the size even further and widen the stops and targets. In essence, this would be like trading a regular range under normal conditions as we would be reducing our leverage. Another issue is entry and the potential for a breakout. Friday’s close is attractive for a range trade (right above support); but it greatly increases the potential for a breakout if there is activity over the weekend. As such, it is best to wait to not place orders until after we see how price action unfolds for the new week. Finally, we will avoid significant event risk next week by canceling all open orders by Tuesday.

Event Risk UK And Australia

UK – Economic data from the UK next week will run the fundamental gamut; but the docket’s influence on price action is questionable. Through the first half of the week, the market will receive full and up to date coverage on the economy – a timely offering considering the level of speculation surrounding the severity of the UK’s forthcoming recession. The PMI readings on the service, manufacturing and construction sectors for October will give a good overview on output levels. It is the consumer that is the real concern however and the confidence gauge will go a long way for tailoring growth forecasts. These readings aside though, the BoE’s rate decision is the top event risk next week. The MPC is expected to cut by another 50bps on Thursday, an aggressive pace for this policy authority.

Australia – Fundamental event risk is heavy for the Australian dollar and the big indicators will begin to cross the wires almost immediately when liquidity returns after the weekend. Monday morning brings the manufacturing activity survey; but the real interest will be in the regular market mover – retail sales. As a gauge for consumer spending, it is also a good barometer for the overall economy. Tuesday morning in Australia, the RBA will announce its rate decision with an expected 50bps easing. Recently, policy officials have suggested they would take greater consideration of data going forward and fear in the financial crisis has eased somewhat; so there could be a surprise element to this event. To make sure that there is one more chance at a breakout on the following day, the usual employment change is a regular volatility driver and will be watched closely depending on the outcome of the policy decision.

Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.