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EUR/GBP Channel Looks To BoE Quarterly Inflation Report

EUR/GBP Channel Looks To BoE Quarterly Inflation Report

2010-05-11 20:07:00
John Rivera, Currency Analyst
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RT1

How stable is the EUR/GBP Range?


• Levels to Watch:
-Range Top:       0.8650 (Trend, Pivot)
-Range Bottom: 0.8440 (Trend, Pivot, Bollinger)

The Euro-area and the U.K. have taken turns raising concerns and calming fears, as both face bulging budget deficits and few solutions. Today was the U.K.’s turn to ease concerns as the political picture began to clear with speculation that Conservatives were looking to join forces with Liberal Democrats to form a majority. The news comes as euphoria over the monumental aid package for indebted E.U. members fades keeping the EUR/GBP within its current channel.

• An established declining channel has provided solid levels to target for entering and exiting positions. The upper bound is defined by connecting the 3/15, 3/30, 4/19 and 5/3 highs. The lower bound isn’t as defined, but connecting the 3/5 and 4/6 lows provide us with a solid level to target. The lower Bollinger band at 0.8472 has slowed the current decline and could provide support.

Suggested Strategy


• Long: Place an entry at 0.8450 just above the lower bound and below lower Bollinger band
• Stop: Set the stop to 0.8375-75 pips in risk and just below the psychological level of 0.8400.
• Target: The first target is 0.8600-pschological

 

Trading Tip – Considering the recent volatility we recommend waiting for a clear failed test of the lower bound before entering a long position. We saw the pair reach over a 100 pips beyond the upper bound before finally retracing and closing within the descending channel. Therefore, a premature trade could lead to your stop being hit and missing out on the profit potential for the set-up.  Tomorrow’s Quarterly inflation report is a major event risk and if the BoE takes a decidedly dovish tone then we could see sterling weakness come before our entry point is hit. If this is the case those not already long the pair may want to wait for a failed test of the upper bound, rather than chase the move.

Event Risk for Europe & U.K.

Europe – Euro-Zone GDP is forecasted to have risen by 0.1% in the first quarter following flat growth to end 2009. The paltry improvement will fail to ease concerns over the region and could continue to weigh on the Euro. The German Zew reading will also deserve attention as sentiment has been firm despite the debt issues and signs that optimism is fading could significantly lower growth forecasts and stall the current trend in hiring. The consumer price index for the E.Z. may lose some of its market moving potential given the broader concerns, but with the ECB’s sole mandate of price stability an accelerating pace of inflation may be a supporting factor for the single currency.

U.K. – The BoE quarterly inflation report will be the first time we will hear from the central bank in nearly a month. Policy makers froze communication until after the U.K. elections and markets will look to see their take on the course of future monetary and fiscal policy. Inflation is well above the government’s 3.0% threshold at 3.4% and the prospect for price growth could impact the future course of monetary policy. Therefore, the upcoming CPI report will also generate interest to see whether the index validates the MPC’s predictions. The employment report may initially be overshadowed by the central; bank’s report but can’t be discounted as a factor in the future course of price action given its importance on the sustainability of the recovery.

RT2

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