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Euro and Pound Pairs Top Fundamental Trading Opportunities

Euro and Pound Pairs Top Fundamental Trading Opportunities

2011-03-22 21:22:00
John Kicklighter, Chief Currency Strategist
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I can't exist on a diet of technicals alone. There are a lot of chart patterns out there that look primed as clear setups. However, as a trader, it is our burden to assess whether those setups will fall apart or trigger a meaningful trade. And, while that may seem straightfoward; it certainly is not. We have seen far too many instances recently where the perfect technical scenario is pushed into a false entry and subsequently breaksdown. The missing component - conviction. And though technical developments can be pretty good at aligning the market's interests (I am a heavy believer that patterns are self-fulfilling); a fundamental push more frequently provides better follow through. That said, the potential for a collapse in underlying sentiment was a big opportunity these past two weeks; but it has been slow to gain momentum. I still think a big move for risk aversion is perhaps the biggest potential driver; but while I wait for it to infect the masses, there are two other meaningful opportunities that I can trade around: UK interest rate expectations and the revival of European financial risk.

...

Today, I have decided to bail out of my long-term and very low leverage USDJPY long position because the uncertainty surrounding intervention clouds the normal path that fundamentals could take. Should we move back up above 82 and fundamentals support it; I'll consider moving back in. With this position gone, that only leaves me with long GBPAUD exposure. This is risky given the uncertainty surrounding risk trends; but I like the outlook on both sides of this equation - I am a believer of a greater risk aversion effort down the line and that inflation pressures will eventually force the BoE to give in to calls for a hike. As such, I'll stick with my stop at 1.6085 and see what transpires.

...

In the meantime, this swell in UK inflation data this morning led GBPUSD break to multi-month highs. This was not my primary interest when talking sterling pairs though because the attachment to risk trends and precedence for zone resistance up to 1.70 is too dense. Instead, I was more interested in EURGBP which did reverse from its long-term descending trendline / Fib resistance at 0.8750. This was a hold. A true reversal would be a break below 0.8660/50 which is a channel bottom and former resistance. This could come via the pound or the euro which is facing a Portuguese vote tomorrow and the EU summit on Thursday and Friday. This is good timing for this pair but also EURUSD which is now testing its former November swing high at 1.4250 and EURJPY which is positioned at the verge of a major reversal at 116/115 zone resistance. This two can be traded as a pair (long one, short the other) to curb risk and allow for clear technical levels to play as entry, stops and targets.

...

Other pairs that are looking interesting to me now are AUDJPY and CHFJPY which are both hovering just below former support, treating it as new resistance. The Japanese situation seems to be stabalizing; so so too should these pairs' volatility. That being the case, we could have more straightforward responses to technical patterns - I am particularly intersted in CHFJPY potentially reversing from 90.

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