We have seen an active start to the week with both the US dollar and British pound extending significant moves. However, this sharp move may have already met its limits – at least in the near-term. For EURGBP, the rally has already spanned nearly 100 points (a substantial move considering this pairs normal mode of activity); and spot is now upon a significant range of highs.
[B]How stable is the EURGBP Range?
• [U]Levels to Watch[/U]:
-Range Top: 0.8825 (Fibs, Range High)
-Range Bottom: 0.8700 (Pivot, Fibs, SMAs)
• [/B]From an economic standpoint, the UK and Euro Zone are close trade partners and frequently find themselves in similar economic and interest rate situations (that is to be expected when the UK has worked towards adopting the euro in the past). Outside of sentiment-based fundamental shifts, there are a [few specific pieces of event risk](http://www.dailyfx.com/story/market_alerts/fundamental_alert/US_Dollar__Swiss_Franc_Trade_1252695594966.html) that could spark unfavorable volatility. Most of the data come from the UK (like CPI or jobless claims). [B]
• [/B]We have just passed from a significant trend through late-August into another bout of congestion. After a sharp rally from EURGBP, momentum is now contesting a high of 0.8820/35 that is defined by a range of daily pivots, a short-term trend and a confluence of Fibonacci levels. Support is arguably more established however, with a notable 0.87 pivot.[B]
[I]Suggested Strategy[/I]
• [U]Short[/U]: Entry orders will be set at 0.8815 so as not to require too much of the range.
• [U]Stop[/U]: A stop of 0.8845 is notionally close, but volatility is less concerning than a true breakout. To secure profit, move the stop on the second lot to breakeven when the first target hits.
• [U]Target[/U]: The first objective is one-and-a-half times risk (45) at 0.8770. The second is 0.8725.
[/B]
[B]Trading Tip[/B][B] – We have seen [an active start to the week](http://www.dailyfx.com/story/bio2/Euro_Looking_to_Carve_Meaningful_1252909013850.html) with both the US dollar and British pound extending significant moves. However, this sharp move may have already met its limits – at least in the near-term. For EURGBP, the rally has already spanned nearly 100 points (a substantial move considering this pairs normal mode of activity); and spot is now upon a significant range of highs. Over the past three weeks, we have seen a number of instances where daily reversals have capped price action in the 0.8820/30 area. Add to that the notable Fib confluence in the same region; and we are supplied with a clear make-or-break level to work with. Our suggested strategy looks to fade this morning’s rally as it comes up to the aforementioned resistance. Without a clear trend in either the euro or pound, this pair has a better-than-even chance to hold up to most other influences (due to the two economies’ strong economic ties). For risk trends, there is a notable bias to be concerned; but the roles of high and low-risk are variable depending on the situation. Timing is imperative in this case. Since we are largely basing this setup around an opportunity to fade momentum in a trend, this position should take less than 24 hours to trigger and find its way into profit. Beyond that limit, we will remove open orders. [/B]
[B]Event Risk for the Euro Zone and UK[/B]
[B]Euro Zone[/B] – The euro has been a fundamentally stable currency for months now. Growth numbers have confirmed the region’s two largest economies have returned to positive growth, the policy authorities have been transparent in their turn to a neutral policy and there has been little discussion about any financial troubles lingering in the European markets. This has decoupled the currency from trends in risk appetite; but the link has not been fully broken. As the foil to the US dollar, the euro will indirectly feel the burden of sentiment that guides the highly-sensitive dollar. Another beneficial condition for holding a range is the light economic calendar. Among the indicators scheduled for release, few if any have a history of making a notable influence on price action. The regional trade reports and inflation data are fundamentally noteworthy; but from a speculative perspective, the member data is fully accounted for. The German ZEW survey is one of the few with a timely and unpredictable essence; yet it has a spot past for encouraging volatility.
[B]UK[/B] – Deciphering the British pound’s status in the risk/reward field is essential for distinguishing trend; but it is not a very straightforward endeavor. From a fundamental perspective, the currency should be considered a funding currency for the recovering carry trade. The Bank of England is flooding the system with money and the MPC has telegraphed their intentions to maintain benchmark lending rates at their current, record-low level until at least the middle of next year. The painful extension of the worst recession the economy has suffered since WWII is another anchor for this policy; but it also warps the usual sense of safety associated with funding currencies. What’s more, the pound stands to benefit most from a bullish turn on the world’s economic outlook – especially with such a reactive policy body. Notable event risk to watch in the meantime includes CPI and jobless claims for August.
