Trade the Pound, Hold the Dollar

04/01/2020 9:59 am EST

Focus: FOREX

Joe Perry, CMT

Market Strategist, FOREX.com

When U.S. economic news is dominant, moves in the dollar can overwhelm any currency in its path and obscure the strength/weakness of that currency. Better to trade vs a more neutral partner, writes Joe Perry.

In our most recent “Week Ahead” we highlighted the daily British pound/US Dollar (GBP/USD) chart as our Chart of the Week. We discussed how the 61.8% retracement level from the March 9 high to the March 20 low at 1.2510 was initial resistance. The pair has yet to break above; however, the pair may just be consolidating before a move higher (see chart).  

USD
Source: Tradingview, FOREX.com

Regardless, Tuesday represented the end of month and end of quarter.  Stock indices are 20% off their lows and there has been a lot of stock re-balancing and window dressing into today.  Stocks may be ready for a pullback.  If that is the case, many times we see commodity currencies pull back with stocks.  Therefore, perhaps we can look at a commodity currency to trade vs the GBP.

If you like the Great British pound and you don’t want to trade it vs the U.S. Dollar (the USD has been the most volatility currency of late and its fundamentals can overwhelm and other currency it is traded against), there are other options to trade it vs. different currencies, such as the New Zealand dollar (GBP/NZD). On a daily timeframe, we can see that the pair spiked to 2.1783 on March 9, the Monday after Saudi Arabia announced they would pump oil with unlimited supply.  The pair then traded lower, in volatile fashion, to the up-sloping trendline dating back to July 30, 2019, as well as horizontal support. 

Over the last six trading days (including Tuesday) the pair has traded from a low of 1.9948 to today’s highs at 2.0900, a move of more than 2.3%.  The pair is currently pushing through the 50% retracement level from the March 9 high to the March 19 low near and approaching the spike from March 19 at 2.10, as well as the 61.8% Fibonacci retracement level at 2.1046.  These serve as the first two resistance levels (see chart below).

New Zealand Dollar
Source: Tradingview, FOREX.com

On a 240-minute timeframe, the GBP/NZD has already broken higher above a falling wedge and appears to be heading towards the march 9 high.  For support, the first level is horizontal support at 2.0725.  Below there, is Tuesday's lows near 2.0450 and then the downward sloping trendline near 2.0240 (see chart).

British Pound
Source: Tradingview, FOREX.com

The idea here is that if you like a currency to go higher or lower, make sure you always look at different counter currencies, which may offer better setups, before you decide on a pair, especially when the dollar is so volatile.  In this case, if you like the pound but are a skeptic of the U.S. Dollar, you may wish to trade it vs a commodity currency, such as the New Zealand dollar. 

With the violent moves in the U.S. dollar of late, any currency you trade vs. the dollar, is a matter of the tail wagging the dog. You can be right and lose significantly if that currency’s fundamentals (or technicals for that matter) are overwhelmed by dollar news.

Joe Perry holds the Chartered Market Technician (CMT) designation and has 20 years of experience in the FX and commodities arenas. Perry uses a combination of technical, macro, and fundamental analysis to provide market insights. He traded spot market FX and commodity futures for 17 years at SAC Capital Advisors and Point 72 Asset Management. Don’t forget that you can now follow Forex.com’s research team on Twitter: http://twitter.com/FOREXcom and you can find more of FOREX.com’s research at https://www.forex.com/en-us/market-analysis/latest-research/.

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