Technical congestion in EURGBP makes for an attractive range trade; but the fundamental threat to this setup is considerable. Therefore, to make this a viable play, we have to develop a strategy that limits risk and works within a strict time frame.
Why Would EURGBP Hold a Range? · Levels to Watch: -Range Top: 0.9000 (Trend, Fibs) -Range Bottom: 0.8750 (Trend, SMA, Fib) · The fundamental background behind EURGBP is intricate and the potential for volatility is particular high this weak. This pair is comprised of two major trade partners with speculation underlying growth and interest rate forecasts are polar opposites of each other. The Euro Zone is still treated as one of the best situated economies with rates that will keep a consistent advantage. The UK is looking at the worst recession and rates at zero. Sentiment is changing though and Thursday’s data will amplify it. · Congestion has been a common sight over the past two weeks – but the quiet has been interspersed with sharp and decisive moves. Currently, the market is carving a dwindling range with a confluence of technicals topping off 0.90 and a rising trend threatening to force a break out soon. Suggested Strategy · Short: Entry orders will be placed at 0.8975, within recent daily highs. · Stop: Our initial stop will be set at 0.9050. This is a tight stop; but necessary for our time frame. To secure profit, move the stop on the second lot to breakeven when the first target hits. · Target: The first objective equals risk (75) at 0.8900 and the second is set to 0.8825.
Trading Tip – Technical congestion in EURGBP makes for an attractive range trade; but the fundamental threat to this setup is considerable. Therefore, to make this a viable play, we have to develop a strategy that limits risk and works within a strict time frame. Looking at the congestion that has developed recently, we can see that the market is naturally heading into a terminal wedge pattern that will likely require resolution rather soon. With both the ECB and BoE expected to hand down rate decisions on Thursday, this makes for the perfect catalyst for an already pressing setup. There is significant uncertainty surrounding both decisions; but speculation may be working in our favor. With the BoE clearing the way to a zero benchmark lending rate through commentary, a deeper than expected cut does not pose much threat to volatility. However, the ECB has left traders wondering after deciding to pass over a change in February – meaning a cut will likely be treated to a bearish reaction regardless. This aligns the probability of a breakout in our favor; but we don’t necessarily want to expose ourselves to this risk. We will cancel all pending orders before the central banks announce. If we are still in a position when the vote crosses the wires, our nearby targets and tight stop should work well for us.
Event Risk Euro Zone And UK
Euro Zone – Can the Euro Zone support bullish forecasts for growth and interest rates even as an economic recession and financial crisis mature? For some time, we have seen the euro treated as an economic stalwart – a carry over from a few years ago when interest in the currency led many to believe it would replace the dollar as the market’s primary safe haven. However, conditions have changed and all economies are at one point or another on the recession curve. And, considering the acceleration in its evolving slump as well as the troubles that are emanating out of Eastern Europe, the Euro Zone may actually be behind the curve. This is a big theme fundamental driver, and will likely take considerable time to evolve through price action. On the other hand, there is also the potential for a quick catalyst in this Thursday’s ECB rate decision. At its last meeting in February, the central bank held its primary cash target at 2.00 percent. This was taken as a cue that the central bank was near the end; but such optimism in gloomy times can easily crush.
UK – The United Kingdom is the fundamental laggard of the world economy. Traders wrung the pound for all the bullish sentiment that it carried through the high liquidity and leveraged years that preceded the current financial crisis; and when most of the devaluation was complete, economists and other market participants pegged the currency and its economy as the worst positioned for 2009. However, there is always a point of equilibrium when the negative forecasts are fully priced in. We may have already passed this point with the pound. Already pulling back from record lows, we have seen the pound gain ground as its global counterparts tumbled to meet it. Thursday’s rate cut is already fully priced in (a move down to zero by next month would not surprise). What’s more a deepening contraction is expected. Therefore, the pound will likely be buffered to negative data and surprised by any positive outcomes.
| Data for March 4 – March 11 |
| Data for March 4 – March 11 | ||
| Date (GMT) | Euro Zone Economic Data |
| Date (GMT) | UK Economic Data |
| Mar 5 | German Retail Sales (JAN) |
| Mar 4 | PMI Services (FEB) |
| Mar 5 | Euro Zone GDP (4Q P) |
| Mar 5 | BoE Rate Decision |
| Mar 5 | ECB Rate Decision |
| Mar 6 | BoE Housing Equity Withdrawal (4Q) |
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| Mar 10 | Industrial Production (JAN) |
Questions? Comments? You can send them to John at jkicklighter@dailyfx.com.
