EUR/GBP Range Draws Attention During Holiday Trading

The EUR/GBP has settled into a short-term range as neither European currency can gain traction with the issues in Ireland weighing on both. The Euro has been more sensitive as there are greater risks that the debt s issues will spread to Spain and Portugal. However, the outlook for U.K. growth has started to dim as the New Year brings stricter austerity measures from the coalition government. Holiday trading should limit the potential for new trends and extended break outs, potentially leaving the pair confined to its current formation. Therefore, we will look to target the range bounds for possible entry and exit levels, as the current environment is discouraging us from making any longer-term set-ups.

Levels to Watch:

-Range Top: 0.8545 (Range, Pivot)

-Range Bottom: 0.8445 (Range, Pivot)

Charts created using Strategy Trader– Prepared by John Rivera

Suggested Strategy

• Long: Place an entry at 0.8445 or Short:Place an entry at 0.8545
• Stop: Set the stop to 25 pips in risk
• Target: The opposite bound of the trade

Trading Tip – The EUR/GBP range is narrower than we typically like to trade in this report as fundamental influences lose some significance in a shorter time frame. The low holiday volume could limit the potential impact of event risk and could provide an opportunity to fade the post reaction. A light economic calendar will amplify the importance of technical levels giving us greater confidence in our set-up. Typically, we would warn that a break of either bound could lead to an extended move, but we have seen a lack of follow through in recent trading which should become more symptomatic as we get closer to the holidays. Therefore, brief breaks of the bounds may be considered tradable opportunities as we look for reversal on lack of conviction.

Event Risk for European and U.K.

European – The European docket is full of second tier releases with German CPI presenting the most market moving potential. A rise in inflation in the Euro-Zone’s largest economy typically fueled yield expectations, but given the ongoing troubles in the region, there is little potential for tightening from the ECB in the near-term. French consumer spending and producer prices will merely be glanced over by traders and shouldn’t provide any significant volatility.

U.K. – The biggest event risk for the pair will come from the release of the BoE minutes. The central bank has been handcuffed by inflation above their 3.0% threshold, despite policy makers concerns over the impact from austerity measures on future growth. If Andrew Sentence convinced more members that a rate hike is the proper course for future monetary policy, then we could see sterling support generated on higher yield expectations. Conversely, any additions to the QE camp besides Adam Posen could become a weighing factor for the pound.