EUR/GBP just broke a minor support area thanks to fresh bullish U.K. data. Is this the start of a new leg lower or a forex fake out?
I’m going with a simple break of recent support on EUR/GBP, sparked today by a surge in U.K. retail sales, signaling that the consumer sector may be on the upswing. This goes into the “support” bucket for a positive outlook for the U.K. and potential a rate hike by the Bank of England. This potential scenario is the complete opposite of Europe, which is facing a potential Greek debt default, and the quantitative easing policies of the European Central Bank–both pretty bullish for the euro. Overall, both themes put pressure on EUR/GBP and with both stories likely to remain the same for the time being, we can see understand why forex traders would remain bearish.
Back to the technicals, we just saw a break of a minor support area around .7120 that held in April and May. I think there’s a possibility that this may not be a fakeout based on the fundamental themes, and because of those themes, momentum players may hop in on the break. So, I decided to short on the break, and if it is a fakeout, I have a wide stop to limit my max risk. My initial target is the major psychological level of .7000, and once there, I’ll adjust my stop to breakeven go for a big target if it breaks and that area if the current themes remain the same. Here’s my initial trade plan:
Short EUR/GBP full position at market (.7100), stop at at .7300, adjust stop to breakeven at .7000, open max target
I’m only risking 1.00% of my account on this one, and 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!