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EUR/GBP Ascending Channel Provides Swing Trading Opportunity

EUR/GBP Ascending Channel Provides Swing Trading Opportunity

2011-02-04 21:34:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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While the EUR/GBP found itself gaining downside momentum following commentary by the European Central Bank that interest rates are likely to remain low for the time being on muted inflation concerns, the ascending channel for the pair has been marked by pivots forming on significant event risk. As such, any news, over the past few weeks, has generally propelled the pair in favor of the Pound, while little or no news has helped the Euro. With the docket mostly empty until Tuesday, the EUR/GBP is poised to gain, while market-moving data later in the week could result in further losses by the EUR/GBP.

Levels to Watch:

-Range Top: 1.6063 (Trend, 76.4 Fib)

-Range Bottom: 1.5890 (Trend)

Document1_body_Picture_1.png, EUR/GBP Ascending Channel Provides Swing Trading Opportunity

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy

  • Long: Place an entry at 0.84528 (200-SMA)
  • Stop: Set the stop to 0.84043 (23.6 Fib, 50 pip risk)
  • Target: The first target is 0.85328 (50.0 Fib)

Trading Tip – The EUR/GBP pair has fallen steadily since the end of January, though the drop has been fueled mainly by dovish commentary by ECB President Trichet and a declining overall outlook for the health of the British economy. The precipitous drop has sent the pair below the 50-SMA, 100-SMA, and 200-SMA, though the EUR/GBP has retraced some of its losses today, finding the significant 200-SMA difficult to break below. Accordingly, on both 4-hour and 6-hour charts, oversold conditions have been met and stochastic indicators point towards a rally in the near-term.

Event Risk for the Euro-zone and Great Britain

Euro-zone – With little significant data coming across the newswires for Europe over the next few days, there is no major risk of news that would trigger a major reversal to the lower part of the channel. As such, no data may be good data for Europe. Yet traders should keep an eye for any news regarding the EFSF as significant bond auctions will be held the week after.

Great Britain – Looking ahead, the Pound could sustain some losses and reverse course against the Euro as data released on Tuesday will likely show another steep contraction in Britain’s housing market. Furthermore, a widening trade deficit could weigh on the Pound. However, the event posing the most risk will be the key rate decision on Thursday. Commentary signaling future rate hikes – the implied March 2011 interest rate is now 0.920 percent (versus actual 0.50 percent) – would accelerate further losses for the EUR/GBP and result in another test of the ascending channel.

Data for February 7 to February 11

Data for February 7 to February 11

Date

European Economic Data

Date

British Economic Data

Feb 7

Sentix Investor Confidence

Feb 8

RICS House Price Balance (JAN)

Feb 9

Visible Trade Balance (DEC)

Feb 10

Bank of England Announces Rates

Written by Christopher Vecchio, DailyFX Research.

To contact the author of this report, please send inquiries to: instructor@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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