My textbook technical setup on EUR/GBP didn’t play out, likely due to weak U.K. sentiment and broad risk aversion due to China. Here’s a quick forex trade review.
Original Trade Idea: Forex Trade Idea: EUR/GBP Short
This trade is pretty straightforward as EUR/GBP sentiment shifted to the upside and stayed there. It all started with the Bank of England meeting minutes last week that showed only one MPC member in favor of tightening interest rates, which I think was the main driver for the pressure on Sterling recently. The main story of the week–China currency devaluation–has also put pressure on Sterling since it is considered the “risk-on” asset between the two currencies in this pair.
So, the area consisting of a falling trendline, previous levels of interest, and the moving averages easily broke down, and with the China news still strong, EUR/GBP was quickly pushed higher to my stop out level at 0.7120 for a very small loss.
Total: -70 pips/ -0.25%
In hindsight, probably closing the trade down early would have made sense, but with a longer-term trend to the downside, I thought we’d eventually get forex traders jumping in around the .7100 handle to continue the trend. I was wrong, but I paid a very small price for it.
I’m going to stay away from EUR/GBP shorts for now with the strong sentiment shifts in both broad risk and the British pound, and may even consider some longs if the story continues to hold. Stay tuned!