Though market-wide, fundamental winds have died down and volatility has settled after a harrowing two weeks; conditions are still not optimal for range-based trading. Not only is the market still trying to burn off the high pace of price action from last week; but many range boundaries have been overrun. EURGBP is one of the few exceptions with clearly defined levels and relatively muted economic docket.
| Why Would EURGBP Hold a Range?
· Levels to Watch: -Range Top: 0.9050 (Trend, Fib, SMA) -Range Bottom: 0.8790 (Fibs, Range Low)
· EURGBP has broadened its range over the past few weeks as forecasts for growth and monetary policy sparked a sense of uncertainty over the relative strength of these two economies and currencies. However, the most volatile period may have passed. All the potential energy stored up in the ECB’s expected pace of rate cuts and the BoE’s next step to its unconventional policy approach has been spent. However there are economic hurdles ahead.
· Short-term technicals have not provided the clear signal we need to develop straightforward EURGBP trade setups. Therefore, our reference levels have to be broader and tuned into larger patterns. One of the most productive setups for this pair is the head-and-shoulders formation we have seen developed since February. We will see if the shoulder holds.
Suggested Strategy
· Short: Half-sized entry orders will be placed at 0.9020 to account for the trend. · Stop: An initial stop of 0.9090 is wide enough to cover our techs but not yesterday’s lows. To secure profit, move the stop on the second lot to breakeven when the first target hits. · Target: The first objective equals risk (70) at 0.8950 and the second target will be 0.8880. |
Trading Tip – Though market-wide, fundamental winds have died down and volatility has settled after a harrowing two weeks; conditions are still not optimal for range-based trading. Not only is the market still trying to burn off the high pace of price action from last week; but many range boundaries have been overrun. EURGBP is one of the few exceptions with clearly defined levels and relatively muted economic docket. Our primary interest in setting up our strategy is the head-and-shoulders formation of the past three-months. Though this does not fulfill the classic checklist for this pattern (as the entry into the left shoulder is actually bearish), the clarity of the levels and potential for a long-term reversal are encouraging enough. Our primary interest is the right shoulder to this long-term technical structure which is further backed up by a series of indicators (a 50-day SMA, Fib retracements and short-term trendline). To account for volatility, the stop has to be placed relatively wide (to cover the entire zone of resistance), so our entry has to necessarily aggressive. Also, considering this pair moves in pound pips, we have cut the position size in half to reduce risk when range conditions are still not favorable. This position should trigger and hit its first target relatively soon. Otherwise, market dynamics could change or end of week event risk could force a breakout. We will cancel all open orders by Wednesday or should spot hit 0.89 before we are entered.
Event Risk for Euro Zone and UK
Euro Zone – Over the past week, the euro has taken a different direction against its various counterparts; but one thing has been consistent – volatility. This currency will keep its correlation to risk appetite (especially when paired with a unit that has a comparatively high or low yield); but should these winds die down, market participants will have to make a quick shift to fundamentals. There is a substantial round of data due over the coming 24 hours; but the real drive will come later in the week when the member and regional growth numbers cross the wires. We will see the preliminary (first revision) of the 1Q figures. Under normal circumstances, this would be considered less influential; however, the reissued numbers are expected to see a massive revision. This will likely further lead to surprise upon the release of the first round of the Euro Zone numbers – typically dampened as a composite reading.
UK – There are few major fundamental surprises expected for the British pound. The market’s generally accepted forecast for economic activity in the United Kingdom already places it at the bottom of the list for the developed world; and monetary policy has already signaled its shift to desperation with 125 billion pounds worth of quantitative easing planned for the next three months. Therefore, the scheduled economic data set for release over the coming week may find a muted response from the pound. Nonetheless, a number of the releases could significantly alter the outlook for broader growth and financial health. The BoE’s quarterly economic report, the April employment data and March factory activity reports are all top tier releases and should be treated with caution. Perhaps a bigger driver for sterling will be volatility in risk trends as the UK is considered the most fundamentally exposed.
| Data for May 12 – May 19 |
| Data for May 12 – May 19 | ||
| Date (GMT) | European Economic Data |
| Date (GMT) | UK Economic Data |
| May 13 | Euro Zone Industrial Production (MAR) |
| May 11 | BRC Retail Sales Monitor (APR) |
| May 14 | ECB Monthly Report (MAY) |
| May 12 | Industrial Production (MAR) |
| May 15 | Euro Zone GDP (1Q A) |
| May 13 | Jobless Claims Change (APR) |
| May 19 | German ZEW Survey (MAY) |
| May 13 | BoE Quarterly Inflation Report |
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? You can send them to John at [email protected]
