The threat of volatility is extraordinarily high for the currency market. It is an ominous state for the markets when the dollar is turning to congestion on the action-side of a breakout and risk appetite has stalled without a real counterbalance to neutralize sentiment. Altogether, this means that conditions are generally unfavorable for range setups.
Why Would EURGBP Hold a Range?
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 0.8425 (Pivot, Fibs)[/B]
[B]-Range Bottom: 0.8675 (Trend, Fibs)[/B]
· Risk appetite has throttled back over the past 24 hours; but the change has been relatively unseen with EURGBP. This pair is comprised of two currencies whose economies are heavily dependent on one another which subsequently ties their fates together. Risk appetite however is another consideration. There is more to gain from the UK with a global recovery and financial stability. Watch risk, [the ECB and BoE rates decisions](http://www.dailyfx.com/story/bio1/Until_Dollar_Traders_Take_in_1249082933109.html) ahead.
[B][/B]
· The bias so far this year from EURGBP follows the general trend of risk appetite over the same period. A steady advance in the pound’s favor however was broken up in June and the retracement was subsequently larger than its equity’ counterpart. This has left a lasting impression on technicals in a long-term rising trendline and Fib congestion at 0.8425.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Short[/U][/B][B]: Half-size entry orders will be placed at 0.8445 – very near the July reversal low.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 0.8365 is set relatively tight as a trend break could change the market. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (80) at 0.8525 and the second[/B][B] target is set to 0.8625. [/B]
[B]Trading Tip[/B] – The threat of volatility is extraordinarily high for the currency market. It is an ominous state for the markets when the dollar is turning to congestion on the action-side of a breakout and risk appetite has stalled without a real counterbalance to neutralize sentiment. Altogether, this means that conditions are generally unfavorable for range setups. However, for those that are highly tolerant of risk or otherwise have an immediate, bearish forecast for risk trends, there are opportunities. Pairs like EURJPY and CHFJPY are producing notable technical formations (head-and-shoulder patterns); but the danger of a break is extremely high. Our strategy takes fundamentals prominently into account. There are a few pairs that in the scheme of things that find balance through tight economic association or similar associations to risk appetite. EURGBP covers the former; but the pound clearly has a more intense correlation to the health of the global economy and markets. Nonetheless, this pair seems to be more attuned to the general bias and less so to the underlying volatility. This should help fortify the influence of technical support. However, it is still important to monitor momentum and volatility in price action. To trim the inherent risk in this pair (remember EURGBP trades in pound pips), we have cut position size in half and set stops just wide enough to cover the trend and June lows. We will cancel all open orders by Friday’s close.
Event Risk for Euro Zone and UK
Euro Zone – The euro is settled somewhere in the middle of the risk spectrum, which affords the currency some level of stability when the rest of the market is oscillating wildly. However, speculators are trying their utmost to redefine the euro as a risk-philic currency owing to officials’ relatively optimistic forecasts for growth and financial stability along with building expectations for a near-term interest rate hike. Are these forecasts realistic? No. The European regional economy is expected to recovery at a slower pace than many of its counterparts; but speculation can build all on its own. In the meantime, the ECB rate decision on Thursday will be top event risk.
UK – The British pound has surged higher against its relatively lower-risk counterparts at the start of this week. Clearly, this currency is finding market sentiment its primary fundamental driver. However, the fundamentals behind this move are left wanting. Forecasts for a tentative return of positive growth lack confirmation; and even when the technical recovery is in place, expansion will likely be absent until employment and consumer spending return globally. In the meantime, speculation will define price action with few cues as to when a dramatic shift is coming. The only thing pound traders can do is take note of the meaningful economic indicators on the docket and monitor their short-term impact on volatility and lasting ability to guide the currency’s trend (a sign itself that the risk factor could be giving way to more tangible influences). Without doubt, the top piece of event risk over the coming week is the BoE rate decision. There is little probability of a rate change, but growth forecasts and quantitative easing are free rein. Meanwhile, a line of top releases (consumer confidence, services, factory activity) will try to shake the pound’s correlation to risk.
[B]Data for August 5 – August 12[/B]
[B][/B]
[B]Data for August 5 – August 12[/B]
[B]Date (GMT)[/B]
[B]Euro Zone Economic Data[/B]
[B][/B]
[B]Date (GMT)[/B]
[B]UK Economic Data[/B]
Aug 5
EZ Retail Sales (JUN)
[B][/B]
Aug 5
Industrial Production (JUN)
Aug 6
ECB Rate Decision
[B][/B]
Aug 6
BoE Rate Decision
Aug 7
German Industrial Production (JUN)
[B][/B]
Aug 10
BRC Retail Sales Monitor (JUL)
Aug 12
EC Industrial Production (JUN)
[B][/B]
Aug 12
Jobless Claims Change (JUL)
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? Send them to John at <[email protected]>