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EUR/GBP Reliability Presents Profit Opportunity

EUR/GBP Reliability Presents Profit Opportunity

2010-07-01 19:09:00
John Rivera, Currency Analyst
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The Euro is finding support on the back of a successful Spanish bond offering, but the country’s credit rating remains vulnerable as it is under review by Moody’s. Therefore, we could see the single currency give back recent gains on the expected downgrade as concerns linger that the region is still at risk despite plans to rein in budgets. The sterling which has been trending higher since the reveal of the new government’s emergency budget has started to find itself under pressure as markets begin to focus on the austerity measures potential impact on future growth. Nevertheless, the pound was higher on the day against most currencies despite more signs that global growth is stalling. Weak manufacturing readings in the U.S. China and Europe fanned fears that the main engine of the recovery has peaked as governments start to slash spending, a potential cocktail for a double dip recession. The ERU/GBP has been in a descending channel since early March and outside a few breaks of the upper bound on extreme broader volatility , the pattern has been reliable.Levels to Watch: 

-Range Top:  0.8300 (Trend, SMA)
-Range Bottom: 
0.8050 (Trend, Pivot)

RT_10-07-01_1

Suggested Strategy

ShortPlace an entry at 0. 8350 
StopSet the stop to 0.8450-100 pips in risk and above the 6/21 high 
Target
The first target is 0.8166-7/1 low followed by 0.8050

Trading Tip – The lower bound of the current channel has proven to be a firmer barrier than the upper which may require traders to be a bit more nimble when executing this set-up. The 20-Day SMA at 0.8264 has for the most part defined the channel top and failure to break above the level could justify a short position. However, we have recently seen the technical level breached before price action reverses which is why we have set our entry above it and the trend line. Also, the upcoming U.S. non-farm payroll report could generate broader market volatility and traders may want to wait till after the report to take any positions. Regardless, of our set-up traders should monitor the pair as the channel has proved reliable and could continue to generate profits opportunities, as a test of the lower bound will also be justification for a long trade. 

Event Risk for Europe and U.K.

Europe – The European economic docket is has taken a back seat to sovereign credit ratings, the region’s banking system and the global growth picture. Therefore, there aren’t many releases that hold market moving potential. E.Z. producer prices are the most significant metric but with inflation on the decline the ECB isn’t under any pressure to raise rates. However, a sharp drop in prices could ignite deflation concerns which could be a weighing factor for the Euro. The Sentix investor confidence reading should also be monitored as signs that the dismal headlines that the region has produced is weighing on confidence could lower the already diming growth expectations.

U.K. – The Purchaser’s mangers index readings for the construction and service industries could be market moving events for the pound if the gauges show the current recovery is sustaining. Concerns over the impact if the new austerity measured could be eased by signs of growth in the service sector which accounts for 70% of the economy. Although, the construction reading doesn’t hold the same weight, it is a key gauge of the housing market whose rebound is key to a sustainable recovery.

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