A wicked bout of risk aversion hit the markets today thanks to the weak China Flash Manufacturing PMI. Combined with the positive Eurozone PMI data, this was very bullish for EUR/GBP. I don’t know if this is the start of a longer-term bearish move, but the trend since mid-2013 is still to the downside, and fundamentally, the U.K. is doing much better. So, I’m still in favor of sterling over the euro.
Technically, the pair has risen to the previous week low–an area of previous broken support and potentially now resistance–and it has stalled there. This is actually where I exited my last EUR/GBP short trade, so I’d essentially be continuing that position, minus a few pips. Stochastic is also indicating the pair is overbought in the short-term and that the move may be running out of steam. So, I decided to short a small position here at market, with my stop above the next major handle and a big target at the major support last seen mid-2012. Here’s what I’m doing:
Short half position at market (.8230), stop at .8310, profit target at .7800
I’m only risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of around a juicy 6:1. Of course, anything can happen in the forex markets, so if the story changes and/or I’m completely wrong, I’ll be sure to reassess and adjust quickly if necessary.
I’m still long GBP/JPY despite a big move in the yen thanks to risk aversion, but it looks like the area around 172.00 may hold for now. Gonna watch it closely and see how Asia plays where the U.S. and Europe took the Japanese yen. Stay tuned!