Trade Idea: EUR/GBP Channel Retracement

With more and more signs that the U.K. economy ain’t doing so bad after the Brexit vote, I’m looking to buy the pound with this EUR/GBP pullback setup.

EUR/GBP Trade Idea

The U.K. manufacturing PMI for August jumped from 48.3 to 53.3, outpacing the consensus at 49.1 and showing a surprise return to industry growth. This took a lot of traders by surprise since many were counting on business activity to slowdown as the Brexit uncertainty looms over the economy.

This just adds to the growing list of indicators that suggest that the U.K. is able to keep calm and carry on, even chalking up improvements in inflation, hiring, and consumer spending for July. On the flip side, euro zone numbers haven’t been so impressive, reminding traders that ECB officials could pursue additional stimulus measures.

Also, Forex Ninja mentioned in his CFTC update that sentiment for the pound could turn as positioning is hitting extreme levels, hinting that the currency may be bottoming out.

EUR/GBP 1-hour Forex Chart

EUR/GBP 1-hour Forex Chart

EUR/GBP is trading inside a descending channel on its 1-hour forex chart and has just bounced off support, paving the way for a potential correction to the resistance around .8500. This lines up with a former support zone, the previous week low, and the 61.8% Fibonacci retracement level – all of which might be enough to keep further gains in check.

The U.K. construction PMI is due today and a rise from 45.9 to 46.6 is eyed. As for the euro zone, the Spanish unemployment change and PPI are up for release, with weaker figures expected. If these figures come in line with expectations, EUR/GBP could resume its drop right away, especially since it’s already hovering around the bottom WATR and 38.2% Fib. Stochastic is also starting to head south so bears might be ready to take control.

With that, I’ve decided to enter a small position at market and set a higher entry order at the .8475 level. I’ve got a wide stop past the .8600 mark and I’ll aim for the channel support near .8300 as my initial profit target.

As always, don’t risk more than 1% of your account on a single trade and make sure you read our risk disclosure if you’re thinking of taking the same setups.

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  • Marco

    Mmmm…. you have an ascending channel in D1 chart, and price is now at the bottom. I would wait price breaks D1 channel before entering short.

    • Cosmin

      I see the price at the high of D1 channel.
      Another reason to sell.

      • Marco

        this is my analysis. Waiting for the price to break down. I agree is a sell, but there is a buying scenario. Let’s see what happens 😀

        • Cyclopip

          I see, so far that area is holding up really well as support and we’ve got fundamentals to back it up.

          • Marco

            I am waiting in H4 for a buy in the zone

      • Marco

        it seem you’re right! I will see the chart on Monday, I want a clear break to start selling.

        • Cyclopip

          Did you trade this one?

          • Marco

            No, I saw the pinbar in H4 chart for a buy, but there is the channel bottom as resistance. I am waiting for price to enter into de D1 channel and giving me a buying opportunity. I understand what is doing now as a false breakout of the D1 channel at the bottom. Let’s wait…

          • Cyclopip

            Yep, looks like you’re right about that false breakout! Weak UK data propping this pair up right now.

    • Cyclopip

      Yep, I was watching that longer-term channel also, planning on adding on a strong break lower actually…

  • officezombie

    Why have you set your stop so wide at 0.8600?

    • Cyclopip

      Hey man, I just wanted to give the trade enough room to breathe in case price retraces higher and hits my second pullback entry.

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