I’ll talk a bit about a solid short trade I’m in and why I’m in it. The eurgbp short.
This pair has been trending down for about a year now. The global macro data for the Euro Zone has been dragging the euro down as the unemployment rate throughout the eurozone is just hideous, the GDP growth has only been moderate at best, problems from the 2012 credit crisis are still simmering in the background, and now recently Europe has been exposed to geo-political turmoil with Russia over Ukraine. These issues are resulting in the low inflation numbers we have been seeing out of the area for quite a few months, forcing the ECB to lower interest rates and taking other unconventional measures. The easier central bank policy from the ECB will continue to push the euro lower over the coming months ahead.
The UK’s situation has contrasted sharply with the euro zone. It’s employment rate is half of the euro zone’s, its inflation is steady, it’s GDP is on path for solid growth, and as a result the BOE’s policy response will be the exact opposite of the ECB’s. The first interest rate hike by the BOE is expected to be in the 1st quarter of 2015. This created a situation where the two central banks policies are diverging, a scenario which typically sees a nice trending response by the currency pair.
A critical hurdle that the UK needed to clear in order for the pound to continue strengthening against the euro was the Scottish vote for independence that occurred in the middle of last month. With Scotland voting to stay in the UK, a lot of risk behind the pound was removed and the pair should continue on downwards.
Now that the global macro data has been analyzed, and the central bank response has been interpreted. I’ll move onto the technicals of the trade.
First order of business was to establish a line if resistance that showed influence in history. This line I decided would be 0.7890.
Then I went to the hourly chart. Waited for it to be tested, it was actually tested twice. Then I noticed the hourly trend line having been formed, and waited for the break down of that trend line to be my short entry. I shorted at 0.7860.
The SL is 50 pips. I expect the pair to continue moving down for sometime now, ultimately to 0.7500. However my take profit level for this trade will be 0.7700, a cool 160 pips. I will reassess the trade at that level to see if I want to play it down to 0.7500 or if another bounce up is likely, whereupon I can short again at a higher price.
So there you have it, top down analysis starting from the all important global macro data, the central bank analysis, sentiment analysis, and lastly the basic tech analysis. No trade is ever a for sure win, but everything is lined up nicely and a trade like this will win 70% of the time.