Since mid-2013, EUR/GBP has been on a downtrend that lacked any kind of deep pullbacks. We may be seeing a pullback in the works now which may be setting up an interesting long-term short opportunity.
The pair has popped higher in recent weeks, likely on the stabilization of European data and the recent bearishness in the British pound (due to uncertainty of the upcoming U.K. Parliamentary elections). Fundamentally, I’m still bearish long-term on the euro because of the ECB’s quantitative easing program and the seemingly never-ending uncertainty of Greece’s debt problems.
For the U.K., I’m mildly bullish because the U.K. is one of the “stronger” economies among the majors, and I think there’s a chance we’ll start to see buyers step back in after the U.K. election results and market reaction.
Technically, the pair is bucking the downward move. After making a double bottomish formation around .7100, the pair is moving higher to the Fibonacci retracement levels and the falling moving averages on the daily forex chart–both arguments for potential resistance. The stochastic indicator is already signaling potentially overbought conditions, but I think I’ll be prudent and wait for the market to step a little higher to the major psychological area around .7500 before nibbling for short play.
After we get past the U.K. parliamentary elections and see the results/reaction, I’ll likely throw in short orders to play the pullback for a longer-term position. Again, after the U.K. elections, here’s what I may do:
Short half position EUR/GBP at .7500, stop at .7820, max profit target at .7000
Short half position EUR/GBP at .7600, stop at .7820, max profit target at .7000
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 2:1 if both orders are triggered. Again, if the market reaction to the elections are bearish for Sterling, I won’t put my orders in and continue to watch. 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!