Cross-Eyeing: ECB Rate Hike To Push EUR/GBP Higher – Trade Closed

Trade Closed: 2011-7-11 23:58

EUR/GBP 4-hour chart

So much for the euro rallying on the back of an ECB rate hike! All it got was a little boost… certainly not the big rally I was hoping for!

Actually, for a while, it looked like I had caught myself a winner. The ECB delivered a 25-bp rate hike (just as I called it!), and EUR/GBP formed a really bullish candle on the 4-hour chart. But rather than continue up the charts to forge new highs, the euro quickly made a U-turn and headed back down to stop me out.

Apparently, higher interest rates weren’t enough for the euro to shake off the euro zone’s debt crisis ghosts. Just a few hours after the ECB lifted its interest rate, the euro came tumbling back down on contagion fears and concerns about the state of European banks.

Obviously, this was too much for my trade to handle and my account took a little hit because of it.

Trade stopped out: -130 pips / -1.0%.

Looking back, I may have underestimated the bearish pull of the euro zone‘s debt crisis and overestimated the impact of an ECB rate hike. But really, can you blame me? This euro debt drama has been played like a broken record and I thought it was time for the euro to post some gains.

No worries though, we’ve got a fresh week ahead of us and plenty of events to ponder over. Thanks for following and good luck, fellas!

Trade Idea: 2011-7-07 00:30

EUR/GBP 4-hour chart

With the European Central Bank and the Bank of England expected to take different paths in terms of their respective monetary policies, I think there’s a potential setup here to go long EUR/GBP. That’s right folks, I’m gonna establish a position ahead of today’s interest rate decisions!

ECB President Jean Claude Trichet has been heard at the pub lately uttering the words “strong vigilance,” which the markets believe to be a code name for another rate hike. Clearly, even though there are still some concerns about Greek and Portuguese debt, Trichet is concerned about inflation and is determined to keep it in check. With that in mind, many believe that the ECB will once again raise rates by 25 basis points today.

On the other side of the British channel, Mervyn King and other jolly, old chaps at the BOE have been pretty quiet as of late. This isn’t too surprising. After all, the U.K. economy has been turning in Lebron James- like performances as of late. With the economy still struggling, chances are that the BOE will not be making any changes to its monetary policy.

In fact, some say that the BOE may need to add even more stimulus to the economy! If BOE officials come out with a dovish tone and mention the possibility of more quantitative easing, it could get very bloody for the pound.

On the technical side of things, EUR/GBP has been on a steady rise over the past few months. Scaling down to the 4-hour chart, I see that there’s a chance for me to jump in on the uptrend and try to ride the difference in interest rate expectations.

The pair seems to have found support at the 38.2% Fibonacci level. In addition, bullish divergence has formed, with price forming higher lows while Stochastic has made lower lows. I feel that this is a good opportunity to buy, so I’m gonna pull the trigger on this one.

As for my stop loss, I’m putting it last week’s low and the 61.8% Fib level. Interest rate decisions do cause a ton of volatility and since this is based on a longer time frame, this should give my trade enough room to breathe. I’ll be aiming for the top WATR at .9120, but I’ll still be keeping an eye at the previous week high at .9080. If price seems to be stalling at that area, I’ll just close out my trade. Besides it would still give me a 1:1 reward-on-risk ratio, so that wouldn’t be too bad.

Again, here’s the gameplan:

Long EUR/GBP at .8950, stop loss at .8820, take profit at .9080.

Always remember to never risk more than you handle. For me, I’ll be risking my usual 1% on this trade.

To those of you who also have positions ahead of the rate decisions, good luck to you! If any of you have any suggestions or comments on EUR/GBP, feel free to send me a tweet on Twitter or post on my wall on Facebook!