Market sentiment is on the verge of a significant shift; and many well-established ranges are now threatening breakouts. Regardless of what currency pair or instrument you trade, risk appetite will always factor in. The best we can do is isolate and reduce this exposure. With EURGBP, there is no doubt a correlation to risk trends; but the direction and severity of this driver is somewhat dampened.
[B]Why Would EURGBP Hold a Range?[/B]
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 0.8660 (Trend, Fib, SMA, Pivot)[/B]
[B]-Range Bottom: 0.8425 (Trend)[/B]
· Risk appetite has been on the rise through the past week; but the situation hadn’t really met a critical point until today. Many of the dollar and yen-based pairs (as well as the benchmark equity indices) have been pushed to the edge as fear that US lender CIT was nearing bankruptcy has eased and the focus is trained back on impressive earnings. For EURGBP, the impact of risk appetite is not so clear cut. However, the [UK GDP data on Friday](http://www.dailyfx.com/story/bio1/US_Dollar__British_Pound_May_1247860753668.html) will be.
[B][/B]
· From a technical perspective, EURGBP’s general trend from the January swing high has been bearish. The rebound from mid-June is still a correction of this larger trend until a larger retracement can shift momentum. Resistance is formidable though around 0.8650/700. A 38.2% Fib of the April to June bear wave coincides with a trend, pivot and 50-day SMA.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Short[/U][/B][B]: Half-size entry orders will be placed at 0.8645, well enough below absolute resistance.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 0.8725 will cover last week’s swing high and the general trend only. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
[B][U]Target[/U]: The first objective equals risk (80) at 0.8565 and the second[/B][B] target is set to 0.8463.[/B] [B]Trading Tip[/B] – Market sentiment is on the verge of a significant shift; and many well-established ranges are now threatening breakouts. Regardless of what currency pair or instrument you trade, risk appetite will always factor in. The best we can do is isolate and reduce this exposure. With EURGBP, there is no doubt a correlation to risk trends; but the direction and severity of this driver is somewhat dampened. From a fundamental standpoint, the United Kingdom is a part of the European Union and an integral trade partner for the Euro Zone. Interestingly though, if we would have to assign a roles for risky and risk-free asset in the pair, the British pound would likely be the benefactor of a surge in optimism. This is a favorable setup for our strategy. With so many markets on the verge of a bullish breakout (equities, commodities, EURUSD), we could see a short-term break that favors our range. On the other hand, if sentiment merely eases off if path to volatility, this pair would naturally pull back into its range. In the meantime, we have set entries close to resistance to trim our risk profile and placed a relatively wide stop. To reduce risk (as we are dealing with pound pips), we have cut our position size in half. Finally, there must be a timing element to this position. With an advanced 4Q GDP reading from the UK Friday, we will remove all open orders by Thursday or monitor our existing positions closely during and after the event.
[B]Event Risk for Euro Zone and UK[/B]
[B]Euro Zone [/B]– Though most of the earnings reaction remains with the US dollar and Japanese yen, the euro will also have its response to the health of vital players in the global financial market. Policy from some Euro Zone members has taken a decidedly conservative approach with calls to work down deficits and withdrawal support from the financial markets. Should global conditions in fact improve going forward, this will be seen as a smart move that improves the economy’s appeal among its counterparts. On the other hand, should a credit crisis spread from Eastern Europe or anywhere else, the region could be vulnerable. The economic docket presents problems of its own. Advanced PMI numbers will amplify traders’ expectations of 2Q GDP while confidence surveys tip sentiment off.
[B]
UK [/B]– The intensity of risk appetite and risk aversion are still critical components to the British pound’s health. However, while this currency is no longer among the ranks of high yielders; it still has vital stock in the performance of the global economy and markets. Since the financial crisis has evolved into a severe economic recession, the United Kingdom has found itself particularly exposed to the hardships. As global officials start to split on balancing the need to maintain an excessively loose policy to facilitate growth and working down record deficits, Europe’s second largest economy finds itself still struggling to find a turning point. Should other countries remove their aid and work down their deficits, it could threaten the stability of the UK while at the same time marking a more attractive place to park capital. In the meantime, specific event risk could act as a catalyst for volatility. The most prominent release for the remainder of this week is the first reading of 2Q GDP. This is an objective, benchmark for the economy’s health.
[B]Data for July 21 – July 28[/B]
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[B]Data for July 21 - July 28[/B]
[B]Date (GMT)[/B]
[B]Euro Zone Economic Data[/B]
[B][/B]
[B]Date (GMT)[/B]
[B]UK Economic Data[/B]
Jul 22
Euro Zone Industrial New Orders (MAY)
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Jul 22
Bank of England Minutes
Jul 24
Euro Zone PMI Composite (JUL A)
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Jul 22
CBI Quarterly Industrial Trends
Jul 24
German IFO – Business Climate (JUL)
[B][/B]
Jul 23
Retail Sales (JUN)
Jul 27
German GfK Consumer Confidence (AUG)
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Jul 24
GDP (2Q A)
[I]Questions? Comments? Send them to John at <[email protected]>.[/I]