On May 9th, in our GBPNZD report, we had clearly stated that the market has overreacted to the Brexit issue and the currency pair would spike at any point. We had recommended purchasing a one-touch call option contract. As can be seen, both forex and binary option targets were met with relative ease. Now, the rise of the Pound has removed a major portion of the Brexit risk premium from the market.
With just three weeks to go for the referendum, we can expect a rise in the volatility and even a sharp reversal due to the reasons discussed below. Thus, it would be wise to short the Pound based pairs at this point in time. The GBPAUD is one such currency pair that offers a great chance to go short.
The GBPAUD currency pair rallied from a low of 1.8294 to a high of 2.0529 in a matter of five weeks. However, it seems that the party is now over because of the following reasons.
The UK Treasury, which is under the control of Chancellor George Osborne, warned that an exit from the EU would result in a loss of 500,000 jobs. Furthermore, it would see the Pound Index losing 12% to 15% of its value amidst heightened volatility. The GDP would be 2.6% lower in comparison with a scenario where the UK votes to remain in the EU. If that is not enough, the UK’s borrowings would increase to £24 billion. Furthermore, the wages would fall by 2.8%. Thus, we can expect the market to become increasingly nervous (rise in volatility) as the day of the referendum approaches. Most of the traders would avoid long positions at this level.
In the case of Australia, the Central bank had cut the interest rate to 1.75% a month ago. The positive effect of the rate cut on inflation and the economy as a whole is expected to be seen in the data to be released (retail sales, building approvals, and more importantly the GDP) this week. Ultimately, the scenario favors a decline in the GBPAUD pair.
Technically, the RSI indicates a near overbought scenario. The currency pair hit the major resistance at 2.0550 levels and struggles to cross over it.
A forex trader can go short at this level (2.04) with minimum risk. If the prediction goes true, then the trader will realize a profit of 800-1000 pips (take profit between 1.94 and 1.96 levels) in a matter of one month. To minimize capital erosion, a stop loss is advised at 2.07 levels. The trade carries a risk to reward ratio of 1:3.
A binary trader can pick up a ladder (put) option in the GBPAUD pair to squeeze maximum profits. The lowest target in the ladder should be 1.96 or higher. Any expiry date near the Brexit referendum date would benefit the trade. Conservative traders can choose a one-touch put option contract with a target of 2.0000 or higher. The expiry date should still fall around June 23rd, the Brexit referendum date.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
