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EUR/GBP Channel Defined By 20-Day SMA

EUR/GBP Channel Defined By 20-Day SMA

2010-05-18 17:45:00
John Rivera, Currency Analyst







How stable is the EUR/GBP Range?
Levels to Watch:
-Range Top: 0.8600 (Trend, SMA)
-Range Bottom: 0.8375 (Trend, Pivot)
The Pound has come under pressure as the Euro finds its footing despite U.K. inflation reaching 3.7% in April. The two currencies have taken turn falling out of favor which has maintained the current channel. BoE member Adam Posen cautioned that slower E.U. growth could create a drag on Britain’s economy. The dimming growth expectations for the Euro-are will most likely continue to weigh on the single currency and maintaining the current bearish formation.
• The EUR/GBP continues to find resistance at the 20-Day SMA currently at 0.8600. The technical level has come to define the upper bound of the current descending channel for the pair, making it a key level to monitor. The lower bound places potential support near 0.8375, but support could come at 0.8450 which has withstood two recent tests.
Suggested Strategy
• Short: Place an entry at 0.8540-5/18 low to confirm bearish momentum.
• Stop: Set the stop to 0.8605- above 20-Day SMA.
• Target: The first target is 0.8445-5/12 low followed by 0.8375

Trading Tip – The failure at the 20-Day SMA confirms the current channel is holding and justifies a short position. The debt crisis is just starting to fade from the headlines and we are already seeing concerns over the potential impact of the proposed extreme austerity measures for the indebted European nations. Finance ministers from the region attempted to curb fears by reaffirming markets that the measures would only be required of high deficit countries and not those with a healthier fiscal picture such as Germany. Nevertheless, the dimming growth outlook for the region most likely spells further downside for the Euro. However, we can’t discount the fact that we may be seeing sentiment extreme for the single currency with its demise plastered across the headlines of main stream news publications, which could lead to a sharp reversal. A break above the 20-day could lead to a breakout for the pair and traders which position themselves accordingly.  

Event Risk for Europe & U.K.
Europe – The German IFO reading could impact markets if businesses in Europe’s largest economy start to become increasingly pessimistic. Forecasts are for a slight improvement as demand from abroad remains strong which has translated into a stronger labor market. Retail sales for the country could provide Euro support of consumption strengthens on the back of the increase in hiring. An improving domestic growth picture could ease concerns over the potential impact of the Austerity measures son the smaller E.U. members.  
U.K. – Upcoming BoE minutes may not have the impact their typical impact coming on the heels of e the quarterly inflation report. The central bank remains cautious with the issues in Europe and the potential budget cuts from the newly formed government threatening their recovery. Therefore, the upcoming public net borrowing report could be impactful especially if its shows that the government’s shortfall is already heading in the right direction.

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