Fundamental Catalyst – We continue to see an overvalued Euro rate at current levels, with a central bank that has not effectively confronted and dealt with the current financial crisis. More deterioration within the Eurozone is anticipated and we believe this has not been fully priced into the markets. Meanwhile, the situation in the UK is by no means rosy, but does show signs of bottoming with various data starting to come in not as bad as expected; the first signs of some form of a bottom. It is also clear that in the current market environment, central banks need to be more creative in their approach to monetary policy, with money still so tight despite the lower rates. The BoE has definitely been aggressive with their accommodative approach and has now introduced a quantitative easing policy which should prove to stimulate the economy in the coming months.
Eur/Gbp: The cross has broken to fresh six-week highs and continues to surge reaching 0.9300 thus far ahead of the latest minor pullback. However, while below the 0.9520 (26Jan high) 2009 lower top, we continue to look for opportunities to establish short positions in anticipation of a resumption of the broader decline off of the 0.9805 life-time highs from late December 2008. The next key levels to watch above come in by the 0.9330-60 area which represent the 78.6% fib retracement off of the 0.9520-0.8635 move and 61.8% fib retracement off of the 0.9805-0.8635 move. Any evidence of stalling in this area should be used as an opportunity to re-establish short positions. Daily stochastics are already overbought and a move to 0.9330-60 will most likely put the RSI at or close to 70, which also bodes well for a lower top and market reversal. The daily “Average True Range” (ATR) for the cross is 145 pips which now projects a potential high on Thursday right into our fib zone at 0.9355. We will use this level as our entry point. Strategy: SELL @0.9355 FOR A 0.8850 OBJECTIVE, STOP @0.9555. Stops to be trailed to cost on a break back below 0.9300. If trade triggers and 0.9300 not broken, position to be closed out at NY close (5pm EST) on Thursday. Recommendation to be removed if not triggered by NY close on Thursday.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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