EUR/GBP shot to the moon this week on a combination of a broad euro bounce and very strong bearish sentiment on Sterling. Is it time to fade to play the longer term trend?
Sterling took a big hit this week on sentiment that Scotland may leave the U.K., causing a bit of political and economic uncertainty in the short-term. We’re also seeing a broad bounce in the euro, most likely forex traders closing up their euro shorts ahead of the highly anticipated ECB meeting this week to lock in profits and/or reduce event risk. This brought EUR/GBP back up to the major psychological area of .8000 where I think it may find resistance, especially if the ECB introduces new quantitative easing measures this week.
We also have the Bank of England monetary policy meeting this Thursday as well, but there isn’t usually a reaction to the event unless there’s a change to policy. It’s a very low probability that there will be a change, which means Sterling traders may sit on their hands until the BOE meeting minutes later in the month, and I’ll likely be out before then.
So, with the stochastic indicator showing potentially overbought conditions, and the market making a full weekly ATR move to the upside, I decided to short here at market for a short-term, small position swing trade back to the downside. Here’s what I am doing:
Short half position EUR/GBP at market (.7985), stop at .8045, profit target at .7905
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 1.33:1. And I’m only looking to hold onto this trade until the end of the week, unless we get a news headline or other catalyst that favors a continued downward move in EUR/GBP. Stay tuned!