The EURGBP is testing a resistance line that has held since 2008. This indicates the weekly trend is to the downside. Additionally, this means the EUR has been relatively weaker than the Sterling over the past 27 months which makes sense in light of the debt problems the European Union is faced with. Although Trichet is making hawkish comments regarding future interest rate movements, this latest up move on the EUR could be a “buy the rumor and sell the news” type of move.
On March 18, 2011, prices tested and were rejected at this long term resistance line. The last time prices touched the resistance line, the EURGBP dropped nearly 600 pips. A break below .8660 will be added confirmation the trend is likely changing to the downside.
Additionally, the daily slow stochastic is crossing down from overbought levels indicating that momentum is possibly turning down. This gives us a good chance to trade the EURGBP at a good risk to reward ratio. Today’s long red candle confirms an overall weakness in price.
The Trading Opportunity
Look to enter at the market going short with a stop placed just above the high on March 18, 2011. This is about 100 pips of stop loss. Therefore, to maintain at least a 1 : 2 risk to reward ratio, look for at least 200 pips of profit potential. A trader could manually trail their stop to lock in profits in a sustained move to the downside.
Learn more about the strongest trends in the market by trading with DailyFX EDU inside DailyFX Plus. (A live FXCM account username and password is required to enter.)
