The Pound-Dollar jumped on a space rocket yesterday. After touching an intraday low of 1.4976, the pair started to rebound, the shorts panicked, and the pair took off. In my last post (GBP/USD and Sovereign Credit Risk), I mentioned how I’ve been generally bearish on the Pound but could see some rebounds from oversold conditions. However, I was not expecting this turbo-charged upward spike.
It seemed like this short-squeeze was enough to change the short-term game. Most traders were looking for a strong break through 1.5250 and 1.5300 on the pound to say the pair was opening up to reach the 1.5500 zone. It reached an intraday high of 1.5380 today. I was short the pair at 1.5120 and realized the pair was shooting up “for no reason” (i.e. probably a short squeeze). I decided to double down at 1.5165 on this premise. Overall, this was the biggest trading mistake I’ve done in a while. I underestimated the power of the short-squeeze and that the bears were going to run away at 100 miles per hour.
Let’s look at the graph that tells the story:
Click on the image for the full-sized chart
Number 1 on the graph is where the bears started to jump in on weak UK housing price data. It was still in fashion to short any GBP/USD rallies. The pair then consolidated for a few hours. Number 2 shows when the pair dipped on Tuesday after dovish remarks from Bank of England member Kate Barner. Overall, nothing unusual in the price action of the Pound-dollar.
But then there is always Number 3, the massive short squeeze. What probably began as a slight bounce off short-term oversold conditions transformed into a panick. It seems like the tipping point came in after the pair broke the 1.5123 level. At that time, all the bears were running for the exits and I was losing money. There were no fundamentals or real technicals leading the pair higher at the time, just the squeeze.
Nevertheless, squeezes can turn into the new trend. The pair managed to break though key technical levels and put the Pound-dollar in a short-term uptrend. I’m no longer shorting rallies. You will need to see a real fundamental catalyst to see the pair even think about revisiting the lows at 1.4800 (or even 1.5000).
Even though I’m a scalper, I’ll be looking to go long with tight stops at these levels because it opens up room for bigger profits. If bad news regarding US-China relations (“trade war”?), European sovereign risk, or significant economic data (jobs etc) comes out, it will be a time to re-evaluate the GBP/USD strategy.
While the UK is still in scrambles, the FX market currently wants the Pound-sterling a little higher. We’ll follow suit.
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Great post! However, the squeeze was prompted by a rise in UK YoY housing prices. So it did, in fact, happen for a reason. What was surprising to me is that the market ran with that ONE sliver of hope for the UK economy to the extent that it did. That rejection of the low there at #2 was an out and out reversal. I remember ignoring it. I cut losses at #3 – I had great entries above so came out it tiny loss but as you have implied not everyone faired so lucky.
Lydia,
Thanks for stopping by!
But didn’t the housing data come out on Monday? with the pair dropping on the news while the squeeze happened on Tuesday during the US session?