EUR/GBP seems to be breaking out of its recent range and we saw a bounce off of the .7200 handle soon after. Is a break-and-retest setup in the works?
For those following me for a while, y’all know that I’m pretty much a EUR/GBP bear because of the monetary policy and economic health divergence. The U.K. seems to be much further down the road of growth/recovery and raising rates than the euro zone. And it looks like traders all agree this presumption this week with the pair finally breaking lower, below the recent consolidation between .7250 – .7400. The market briefly touched the .7200 handle before bouncing higher, setting up a textbook “break-and-retest” play around .7250.
We’ve got major event risk for the euro coming up this week, so I’m going to stay conservative by waiting for just a little bit more rallying before shorting into the bearish move, as well as using a wide stop of one WATR. I’m using a wide stop and big target as well as I don’t mind holding onto this trade for a while since I would get a positive carry. Here’s what I’m doing:
Short half position EUR/GBP at .7275, max stop at .7425, profit target at .6950
I’m risking 0.50% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 2.16:1. 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!