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Trade Setup of the Day: Short GBP/USD (February 26, 2013)

GBP/USD made a huge gap down over the weekend but price pulled right back up and the pair starting to close the gap completely. 

The previous week’s close is around 1.5241, close to the 50% Fibonacci retracement level. Stochastic is already in the overbought region, hinting at another potential move down.

Shorting around 1.5250 with a stop above the 1.5300 major psychological level and aiming for the 1.5100 area would be a good day trade with a reward-to-risk ratio of 3:1. If you’re going for a longer-term short position, aiming for the 1.5000 round number with a trailing stop would help you press your advantage and protect your profits.

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Take note that Bank of England Governor King is giving a speech today. He just voted in favor of further easing, according to the minutes of the latest monetary policy meeting. The last few times that happened in the past five years, the central bank actually implemented further asset purchases in their next interest rate decision or within the next three months.

Given the Federal Reserve’s intention of tapering off asset purchases, fundamentals are in favor of a GBP/USD short trade. However, Fed head Ben Bernanke is also scheduled to give a speech during the U.S. session today. It’s his semi-annual testimony in Congress so it could be a major market mover.

By Kate Curtis from Trader's Way

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