Cross-Eyeing: EUR/GBP – Close Trade

Close Trade: 2008-09-02 11:25

The Sterling continued to take a pounding this week as EUR/GBP opened up rallying to .8100 and above. My short trade was triggered and quickly found resistance around .8150, holding the British Pound sell off at bay for now.

While my trade idea was mostly based on technical reasons, I feel the fundamentals are going to win this one out. The UK government has made efforts to help the housing market recover, but it appears traders see recession as a real possibility and continue to price in rate cuts into the Sterling. The BOE does have an interest rate decision this week, and while it is widely expected they will hold, the MPC has surprised the market a time or two in recent years. I’d rather not guess whether they will hold or cut, so I’ve decided to close my position out for a small loss.

Trade Closed at market (.8134)

Total: -34 pips/ -0.34%

If price action can be sustained above .8100, we may be seeing a breakout and a new leg higher for the pair in favor for the Euro. We’ll just have to wait and see.

Trade Idea: 2008-08-28 13:19

crosseyed chart

Here’s another chart idea on EUB/GBP. While I took a hit on surprise volatility the last time, I’m not going to be shaken out and miss a possible opportunity.

I have a daily chart up with horizontal lines drawn to market minor and major support/resistance levels. As we can see, the pair is now heading up to major resistance at .8100 where the pair stopped, reversed, and fell all the way back to .7800. Will it do it again? I don’t know and I’m not going to try to predict if it will or not, but I do know that traders will be watching that area once again.

What’s happening with the pair fundamentally? Basically, the doom and gloom of the UK economy, more importantly housing sector, is getting price in while ECB jawbones that they will stay vigilant on inflation, thus negating the idea of Eurozone rate cuts. Sooner or later, UK weakness will be priced in fully and possibly overdone, while the Eurozone will have to shift it’s focus to economic growth as Eurozone data begins to show weakness now. Also, as commodity prices pull back, inflation pressures should give the ECB a little bit of breathing room. Whether this all plays out we’ll just have to wait and see, but my guess is that at .8100 the Euro may be overvalued against the Sterling once again. Of course, if I am completely wrong, I’ll have my stop to protect me. :) Here’s what I’m going to do:

Short EUR/GBP at .8100, stop at .8200, pt1 at .8000, pt2 at .7850

Remember to never risk more than 1% of a trading account on any single trade. For those who have never demo traded EUR/GBP before, that value per pip is almost double that of EUR/USD. Adjust position sizes to stay within risk perameters.

So, if this trade triggers, I look to hold onto it for quite some time. That’s okay as the interest differential favors my short position. Stay tuned!

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  • aeelsherif

    I think this is a very good trade. Although we have seen a massive drop in the EUR/USD from 1.6040 to about 1.4570, this doens’t appear to be coming from a EURO weakness but rather a strengthening USD. This suggests that the EUR is yet to show its own depreciation.

    To expand on my point, I looked at major EUR crosses and they are prettey mixed with relatively high volatility but on the weekly chart there are no major new trends or moves. The EUR/JPY is an exception which has dropped as the USD/JPY fails to sustain a breakout from the 108.50. Also the EUR/AUD is a second exception where the Euro has appreciated to the strong decpreciation in the AUD.

    Now let’s keep in mind two things. The EUR has appreciated about 1000 pips to the GBP since october 2007. Which is around the same time when the pound made its first massive drop to the USD from 2.1 to 1.93.

    Now the time has come for the EUR to go down. The fundementals are against the EUR. With contraction in GDP and a weaking industrial production followed by a weakining domestic consumption the outlook for the EUR indeed looks bearish. The european economy is not immune. It heavily relies on the US and GB economies. It might just not suffer as much as the american and british economies as a result of the easing of the CPI worldwide due to falling commodity prices. This will allow the ECB to lower intrest rate and stimulate the economy.

    This theory only discusses that the EUR is going down not that the GBP is going up. I think the GBP/USD will find a good cushion at 1.8000-1.8100 due to the technical factors. These include support on the RSI on the daily chart. Both oversold stochastics and RSI. Also there is a divergence on the RSI. The MACD looks set to turn. Finally and most importantly the 1.8090 level is the lowest level the GBP has reached since it entered its upward channel in April 2006 and kept within it until December 2007.

    Lastly, why trade EUR/GBP and not EUR/?. Well i would defnitley not trade EUR/USD as the recent hike in USD could see a reversal. Although the EUR would be weakening simitanously, the USD would be weakening more and this would reasult in EUR/USD appreciating and you loosing your money. The risk reward ratio is not of my liking. A very good opportunity has opened up in EUR/AUD. The pair has reached a very strong resistance level. EUR/JPY has weakened too much and a rebounce could be seen as a result of JPY weakness as japan starts to show economic problems. The only reason i’m not trading EUR/AUD is because I haven’t kept a good eye on the Aussie economy but i personally think from the technicals that it looks very very promising. I might be proven wrong if the AUD decides to continue its dive.

    My suggestion for the trade of EUR/GBP:
    – Sell 1/2 a position at 8.075 with a stop loss at 8.150
    In case the price goes against you, sell the other half at:
    – Sell 1/2 a position at 8.100 with a stop loss at 8.200

    Target: 1/2 position at 0.7600
    Target: 1/2 position at 0.7400

    After a 100 pips in your favour set stop as to break-even. Later cap in profit by lowering stop but allow more of a breathing space for your trade. Minimum 100 pips trailing stop. Suggested 150-200. This is a long term trade.

    My only objection to the above trade is the risk reward ration. Sell at 0.8100 : Stop at 0.8200 : Limit at 0.8000. I might as well go play roulette. The is more room for the EUR/GBP to go down than just 0.8000.

  • aeelsherif

    I think this is a very good trade. Although we have seen a massive drop in the EUR/USD from 1.6040 to about 1.4570, this doens’t appear to be coming from a EURO weakness but rather a strengthening USD. This suggests that the EUR is yet to show its own depreciation.

    To expand on my point, I looked at major EUR crosses and they are prettey mixed with relatively high volatility but on the weekly chart there are no major new trends or moves. The EUR/JPY is an exception which has dropped as the USD/JPY fails to sustain a breakout from the 108.50. Also the EUR/AUD is a second exception where the Euro has appreciated to the strong decpreciation in the AUD.

    Now let’s keep in mind two things. The EUR has appreciated about 1000 pips to the GBP since october 2007. Which is around the same time when the pound made its first massive drop to the USD from 2.1 to 1.93.

    Now the time has come for the EUR to go down. The fundementals are against the EUR. With contraction in GDP and a weaking industrial production followed by a weakining domestic consumption the outlook for the EUR indeed looks bearish. The european economy is not immune. It heavily relies on the US and GB economies. It might just not suffer as much as the american and british economies as a result of the easing of the CPI worldwide due to falling commodity prices. This will allow the ECB to lower intrest rate and stimulate the economy.

    This theory only discusses that the EUR is going down not that the GBP is going up. I think the GBP/USD will find a good cushion at 1.8000-1.8100 due to the technical factors. These include support on the RSI on the daily chart. Both oversold stochastics and RSI. Also there is a divergence on the RSI. The MACD looks set to turn. Finally and most importantly the 1.8090 level is the lowest level the GBP has reached since it entered its upward channel in April 2006 and kept within it until December 2007.

    Lastly, why trade EUR/GBP and not EUR/?. Well i would defnitley not trade EUR/USD as the recent hike in USD could see a reversal. Although the EUR would be weakening simitanously, the USD would be weakening more and this would reasult in EUR/USD appreciating and you loosing your money. The risk reward ratio is not of my liking. A very good opportunity has opened up in EUR/AUD. The pair has reached a very strong resistance level. EUR/JPY has weakened too much and a rebounce could be seen as a result of JPY weakness as japan starts to show economic problems. The only reason i’m not trading EUR/AUD is because I haven’t kept a good eye on the Aussie economy but i personally think from the technicals that it looks very very promising. I might be proven wrong if the AUD decides to continue its dive.

    My suggestion for the trade of EUR/GBP:
    – Sell 1/2 a position at 8.075 with a stop loss at 8.150
    In case the price goes against you, sell the other half at:
    – Sell 1/2 a position at 8.100 with a stop loss at 8.200

    Target: 1/2 position at 0.7600
    Target: 1/2 position at 0.7400

    After a 100 pips in your favour set stop as to break-even. Later cap in profit by lowering stop but allow more of a breathing space for your trade. Minimum 100 pips trailing stop. Suggested 150-200. This is a long term trade.

    My only objection to the above trade is the risk reward ration. Sell at 0.8100 : Stop at 0.8200 : Limit at 0.8000. I might as well go play roulette. The is more room for the EUR/GBP to go down than just 0.8000.