Starting off the new year with a simple forex trade idea on EUR/GBP. Will we see the pair back to the top of the longer-term range?
Recent sentiment on the British pound has been rough with recent data from the U.K. indicating that its recovery may be slowing, also on recent broad risk aversion sentiment thanks to the renewed drama of a potential Grexit. If the current drivers continue to take EUR/GBP higher, I’ll look to short the pair because at the end of the day, the eurozone growth is still weak, inflation is sliding, and quantitative easing from the ECB may be coming very soon.
It’s a simple technical setup, but with the Bank of England monetary policy decision (expectations of no change) this week, I’m going with a pretty conservative entry technique in case we see surprises from the MPC. I look to short small positions at the major psychological levels that were also strong areas of interest over the second half of 2014. My max stop will be on a break of the top of the range on the daily chart above, and my initial profit target will be the bottom of the range, where I’ll re-assess and decided whether or not to go for a bigger profit. Here’s what I am doing:
Short half position EUR/GBP at .7900, max stop at .8080, initial target at .7750
Short half position EUR/GBP at .8000, max stop at .8080, initial target at .7750
I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2.3:1 if both positions are entered. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!