EURGBP May Be One of the Few Pound Crosses to Hold its Range

Volatility may have died down over the past 12 hours; but this does not mean conditions are automatically ideal for range trading. Those familiar with the term ‘in the eye of the storm’ know that this calm may be temporary – especially with so many temporary ranges having been developed over the past week and needing resolution.

Trading Tip – Volatility may have died down over the past 12 hours; but this does not mean conditions are automatically ideal for range trading. Those familiar with the term ‘in the eye of the storm’ know that this calm may be temporary – especially with so many temporary ranges having been developed over the past week and needing resolution. EURGBP would likely be able to weather much of the unforeseen tumult related to risk appetite (the primary source of volatility over the past few months); but a true shift in sentiment could nonetheless encourage a breakout and/or new trend from the struggling British pound. The other chief market driver (growth and yield forecasts) can be far more influential. The second reading of 2Q GDP for the UK could prove a catalyst for action considering the market’s predisposition with big-ticket British data while the country lags its global trade partners in its recovery from the worst recession in generations. As for the suggested strategy itself; our entry, stops and targets are based on a short-term basis rather than covering the extreme highs of July. We are looking to cover recent highs and the falling trendline that defines the past three months’ highs. This will help define a more reasonable time frame for our position. The first target under our scenario is much easier to reach within a day or two than one that was to be set equal to a stop that was positioned above 0.87. We will cancel all open orders before Friday’s close.

Event Risk for the Europe and the UK

Europe – Over the past week, the European docket has been relatively light – leaving the euro to be caught up with commentary and general risk appetite. Looking ahead though, the currency may once again find direction from within its own boarders. Before the week closes, we will receive a timely update on general economic activity when the market is already focusing on growth. The advance reading of August PMI numbers for service and manufacturing activity for the Euro Zone and Germany will stoke speculation for the pace of recovery through the 3Q. In contrast, the second reading of 2Q GDP figures next week for Germany will offer updates on component indicators’ trends; but the market will likely have to alter the outlook little considering how modest these modifications usually are. Aside from this data, a hearty round of confidence surveys and German CPI will supply short-term volatility.

UK – It has been an unexpected volatile week for the British pound. The market is clearly focused on the health of Europe’s second largest economy and the timing of a return to a hawkish monetary policy considering the reactions to inflation data as well as the BoE’s uneven vote that saw three members voting for a bigger increase in the bond purchasing program than was actually passed a few weeks ago. This market sensibility will likely carry forward as the UK’s global counterparts are already on the path to recovery (though it may be slow and restrained). For this reason, the 2Q GDP reading could still be market moving despite it being a first revision. Notable changes in important components (consumer spending, housing, business investment) could have a notable impact on impressions. Other indicators including the BBA loans figures, CBI distributive trades and consumer confidence survey all have volatility potential.

Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? Please send them to jkicklighter@dailyfx.com.