I’m going with a simple technical setup, with a little bit of fundamental bias towards the British pound.
Traders have been in favor of Sterling for quite some time now, and after some bullish remarks from the Bank of England, it looks like that sentiment will be around for awhile. Also, I am slightly bearish on the euro as we saw weak data from the Euro zone this weak (weaker-than-expected ZEW economic surveys and manufacturing/services PMI). Also, negative interest rates were mentioned by an ECB official a couple of weeks ago, so this also an outlier play on the highly unlikely event that the ECB actually makes it happen.
Technically, we’re seeing the .8250 area hold as resistance, which is a minor psychological area as well as a Fibonacci retracement area of the recent swing move lower. Since the pair is in an overall downtrend since August 2013, so I like the odds of the pair moving lower from here. Also, it’s finding resistance above its normal volatility range, which could draw in mean reversion traders looking for the pair to return back to the week open price.
I’m shorting here at market with a relatively tight stop above the resistance area. My soft target is the bottom of this week’s volatility range, but I’ll look to re-assess and adjust if it does make it down there. Here’s what I am doing:
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 about 1.6:1. but if the market does go my way, I’ll look to scale into a bigger position and trail my stop to increase my max reward, while limiting my risk.
My biggest concern for this trade is if we see global risk aversion moves once again, which typically favors the euro in this pair. But of course, since I limited my risk, there’s not really a lot to worry about and just let it ride!