The London session has opened risk-on, with the higher-yielding currencies relatively stronger than the safe-haven currencies. This is indicating a good start for risk assets like equities. Looking at the Youtrading.com heatmap the strongest currency is the New Zealand dollar and one of the weakest is the British pound.
Last week’s forex strategy video detailed how I was using the Asia-Pac session range as a guide for whether or not the continuation lower in the GBPNZD was to continue. This technical setup was shown to be in line with the daily momentum and price action, as the 20, 50 & 200 daily EMA's were all pointing lower, and the price action was currently under a significant swing low.
In that video, I had a target for the most recent bearish set up at 1.8905, and today that target was met. Looking at the current price action we have an aggressive breakout forming to the downside so we could be targeting 1.8640 if you place your Stop Loss above today's Asia-Pac session high and have a risk to reward ratio of 1:2. Fundamentally nothing has changed to make me more positive on the pound versus the New Zealand dollar, and if anything, the next few days of Central Bankers' talk could accelerate the demise of the pound.
We also have a higher probability of the UK government moving to a no-deal Brexit with the talks of triggering Article 16 of the Northern Ireland protocol.
What is Article 16?
As part of the UK-EU Withdrawal Agreement, Article 16 is a safeguarding mechanism to avoid a hard border on the island of Ireland. Under Article 16, either party may take unilateral safeguarding measures if the protocol causes "serious economic, societal, or environmental difficulties that are liable to persist, or to diversion of trade".
Any actions taken must be “restricted with regard to their scope and duration” and must only address the issues explicitly identified. The provision of Article 16 of the protocol does not permit either party to suspend it permanently or in its entirety.
From the above graphic triggering Article 16 would be the start of a process, so nothing is likely to happen overnight, and it may be a way for the two sides to leverage their positions.
Looking at the ActivTrader sentiment indicator there is a massive imbalance between the two sides of the trade with 89% of traders on the platform bullish on the pound. The only way this would make sense is if the Bank of England raise rates to match the RBNZ, the no-deal Brexit fear went away, and the UK economy showed rising GDP. Until one or more of those things occur, I can see these Bullish traders puking their positions around the 1.86200 level as that is the swing low that bookended the 2020 price action and the start of the 2021 rally.