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 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.