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Short-term trading idea FX GBP/USD - bear speculation: expected drop below the 1.2550 - 1.2710 support zone

Trading opportunities on the currency pair: The British pound's slide began on Thursday the 25th of May, after the release of downwards revised GDP data for the first quarter. Pressure on the currency increased after a breakout of the upper boundary of the A-A channel and the TR trend line. The GBP/USD rate returned to the 1.2550 - 1.2710 zone, which had been acting as a resistance until the 18th of April. My base scenario sees the rate falling to around 1.2643 in time for the FOMC meeting on the 13-14th of June.

Background:

The previous idea on the Cable was published on the 10th of April. At the time of writing, one pound was trading at 1.2370 USD. At the time, the price was trading in the middle of its range, so I was expecting, in the event that the price bounces from the support, for the price to rise up to the upper boundary of the 1-1 range at 1.2550, and then to 1.2710. Should the price have fallen below the minimum of 1.2346 set on the 7th of February, I was expecting the pound to fall to the lower boundary of the 2-2 channel at 1.2210.

On the 18th of April, the British pound strengthened against the greenback by 3% to 1.2903. This was triggered by British Prime Minister Theresa May's announcement of her government's intention to hold a snap election on the 8th of June. The Conservative party is expected to remain in power, with Theresa May retaining her post of Prime Minister as the UK continues the process of exiting the EU.

Daily chart. Source: TradingView

After May's statement, the pair's growth slowed down. The pound appreciated against the dollar to 1.3040 in the space of 23 days. It started to decline on the 25th of May after the UK released its GDP figures for the first quarter, showing a downwards revision. Pressure on the pound increased after a breakout of the lower boundary of the A-A channel and the TR trend line.

In the latest COT (Commitments of Traders) report, released by the Commodity Futures Trading Commission (CFTC) on Friday, large speculators have increased their long positions and reduced their short positions, while small speculators have reduced both.

Large speculators (Non-commercial): long positions have increased by 1,213 to 46,264 contracts. Short positions have fallen by 7,065 to 73,661 contracts. Net-short positions are down by 10,301 for the week at 27,399 contracts.

Small speculators (Non-reportable positions): long positions have fallen by 758 to 31,955 contracts, while short positions have fallen by 1,580 to 31,421 contracts. Long positions have seen an overall net increase of 534 contracts.

The last two days aren't accounted for in the COT report. From the report, we can see that small speculators have reduced both their long and short positions. Large speculators have opened long positions and reduced their short ones. However, this trend won't necessarily continue.

The Cable has returned to the range of 1.2550 - 1.2710, which had been acting as a resistance up until the 18th of April. My base scenario now is a drop in the rate to 1.2643 by the time the FOMC sits down for their meeting on the 13-14th of June. If, after breaking through the trend line, sellers don't manage to break through the 160 pip support zone, we could see the price return to 1.2987 just below the trend line by the 9th of June, 2017.

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