Third quarter GDP will be released out of the United States on Friday. The release is likely to drive volatility among the Dollar pairs. The figure is expected to show a rise of 2.5% following a final reading for the second quarter indicating a rise of 1.4%.
While the figure can provide a positive surprise, GBP/USD trades at an important support level and offers a low-risk entry that is accompanied with a large reward in the event of a disappointing number. After a sharp rise in the Dollar during the European and North American overlap, the Greenback is starting to pull back. The trade setup counts on a bounce from current levels, to further tighten stops ahead of the US data.
The trade setup can be used to hedge existing long US Dollar positions ahead of a risk event that is expected to be volatile.
Among the majors, GBP/USD carries somewhat of a higher potential for an upside move, in the case of a pullback in the Dollar. An article published yesterday, states the case for why we may potentially see a stop run in GBP/USD as a result of positioning.
An obvious resistance level is seen in GBP/USD at 1.2312. The level references prior support following the flash crash and resistance after the pair fell below the level. A trendline that broke last week also offers additional confluence. Because of the strong resistance in the area, it is likely that liquidity hunters will attempt to drive the pair above the level, in the event of an upside move.
The next notable horizontal level is seen near the 1.2400 handle. The level provided support in the recovery attempt following the flash crash. The take profit has been set near the secondary level.
On an hourly chart, a strong confluence of support is seen near today’s lows. A horizontal level resides at 1.2153 and references a spike low ahead of a larger rally on Wednesday. A 61.8% Fibonacci level measured from Tuesday’s lows to today’s spike high falls at 1.2154, and a rising channel adds further confluence. The support cluster allows a small stop loss to be used in the trade setup. The low for the day falls at 1.2145, the stop will be placed near the level.
The entry for the trade setup will be at market.
Risk to Reward: 1:7
Time Frame: 1-3 Days