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Brexit Risk-Off Could Favor New Haven Currency Bid in EUR/GBP

Brexit Risk-Off Could Favor New Haven Currency Bid in EUR/GBP

Tyler Yell, CMT, Currency Strategist

Bias: Bullish EURGBP toward September 2014 Highs

Point to Establish Long Exposure: Retracements Against ST Support Like Hourly Ichimoku or Pivots

Target 1: 0.80057 December 2014 High

Swing Target 2: 0.80593 September 2014 High / Dbl Bottom Target

Invalidation Level: 0.7750 Median Line / Weekly Pivot-Support (61.8% Of Current Move Off Higher Low)

This Trade’s Story:

EURGBP has put in an impressive 2016 performance thus far rising by over 8%. Recently, with heightened worry about a Brexit, the GBP sell-off continues. While GBP weakness persists, a trader needs to look at currencies that are equally benefitting from the fear when developing a trade idea. These type of currencies would be risk off currencies, which in 2016 has been CHF, JPY, & EUR. GBP/JPY in the recent JPY rally and GBP weakness has recently fallen below the 50% mark of the 2011-2014 rally.

While there is appropriate fear of EUR going down with Sterling should a ‘Brexit’ develop, there could be more downside for GBP in the near-term with additional upside for EUR in the near term as well. GBP remains the weakest currency among the G10 on an index for 28 currency pairs pitted against a 200-MVA on a 4-hr chart making it an attractive sell in the short-term on retracements that allow favorable risk positioning.

The irony of this analyst pick is that it comes into the March 10 ECB meeting that could be EUR bearish. Also, markets are expected to start pricing in EUR risks under a ‘Brexit’ scenario. However, the market tends to punish the front-runner in a bad news scenario and be relatively kind to the runner-up until the runner-up becomes the main feature. Until then, EUR/GBP may move up to it’s long-term targets.

Trade Idea for EURGBP:

Many traders may stay reluctant to buy EUR blindly after the very aggressive bid has already been displayed vs. the GBP this year. However, we are still short of a long-term double or triple bottom target of 0.8050 on EUR/GBP, which aligns with the September 2014 high.

Current prices above the weekly R2 resistance rarely make good levels to enter. While upside can be present, the retracement risk is often too high to enter a trade safely. A retracement to 0.7850/20 would provide a small pullback with a stop loss below 0.7750 or 0.7710 for traders with more risk tolerance.

The targets will remain between 0.8005, which is the December 2014 high and the double-bottom target and September 2014 high of 0.8053. Such a trade would set up with a near 1:2 risk: reward. This target aligns with a favorable risk: reward ratio that our Traits of Successful Traders report found to be one of the best things a trader can do to ensure long-term sustainability in your trading.

Levels for EURGBP:

Second resistance: 0.80593 September 2014 High / Dbl Bottom Target

First resistance: 0.80057 December 2014 High

Spot: 0.79127

First support: 0.7754 Weekly Pivot

Second support: 0.7720 Weekly Opening Range Low

Right now, our Trader Sentiment Indicator SSI is providing a further bullish bias. The reading on SSI for EUR/GBP sits at the bearish trigger reading at -1.8984, which favors the view that the British Pound likely has room to trade lower against EUR with roughly 65% of retail sentiment net short. The trading crowd has grown further net-short from yesterday and last week. The combination of current sentiment and recent changes gives a further bullish trading bias.

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