EUR/GBP Descending Channel Provides Swing Trading Opportunity

The Euro-Sterling pair has been range bound for the better part of the past three-months, trading in a sideways channel from mid-March to present day. However, the move comes after the pair traded in a steep, tight ascending channel, and a break of that channel in mid-April, leading to a longer-term descending channel developing. The Euro-Sterling pair has been a particularly interesting trade, considering both the Euro-zone and the United Kingdom are facing their own share of troubling fundamental developments that have halted growth in some periphery Euro-zone countries, boosted inflationary pressures in core Euro-zone countries, and stoked a stagflationary environment in Britain. Accordingly, with the pair trading at the top of its recent range, an opportunity to collect profits on the next corrective wave down has arisen.

Levels to Watch:

-Range Top: 0.8933 (Trend, 23.6 Fibo)

-Range Bottom: 0.8524 (Trend)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The chart below shows the Fibonacci extensions and how the EUR/GBP pair has adhered to its significant levels in its recent impulse wave higher.

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

• Short: Place an entry at 0.8830 (20-EMA)
• Stop: Set the stop to 0.8952 (112-pip risk, This Week’s High)
• Target: The first target is 0.8721 (June Low, move up stop to 0.8798, 50-EMA), second target is 0.8610 (May Low)
• Timeframe: 7 to 14 days

Trading Tip – Although the pair has been range bound over the past twelve-plus-weeks, the technical picture in the near-term suggest potential losses as the Euro-debt situation enters its next phase. The RSI on the 6-hour chart has fallen over the past day, from oversold to 49, suggesting further losses. The Slow Stochastic oscillator is pointing towards further losses on the 6-hour chart as well, with the %K falling below the %D, at 61 and 70, respectively. The %D is the more reliable signal as it is a smoothed, three-period average of the Fast Stochastic %D, which is a smoothed three-period average of the %K. The signal to confirm the short play is the MACD Histogram, which, while still in a bullish divergence, the differential is narrowing, now at +4. A negative divergence confirms the downward momentum.

Event Risk for the Euro-zone and the United Kingdom

With the week closing tomorrow, data is typically lighter than other days of the week, though some event risk remains on the calendar. While the United Kingdom doesn’t have any data due until Tuesday, there is a summit for European Union officials regarding the unraveling debt crisis and how it has to be handled.

Euro-zone – The European Union leaders’ summit is in focus tomorrow after the European Troika agreed to a deal with Greek government officials on the fifth tranche of bailout funds. Accordingly, any further commentary by government leaders will likely provoke further volatility for Euro-based pairs.

United Kingdom – With no data on the economic docket tomorrow, the Pound will be guided by general market sentiment. Generally speaking, that has been fairly bearish for the Sterling, but any Euro-weakness will weigh on the EUR/GBP pair regardless of British economic sentiment.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report or be added to his distribution list, please send inquiries to: cvecchio@dailyfx.com

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