I’m seeing plenty of technical indicators lining up neatly for a bullish EUR/GBP position, but do fundamentals support a bounce off this area of interest?
Long EUR/GBP Idea
I had my one good eye on this classic break-and-retest play on EUR/GBP earlier this week but wasn’t fully convinced that the broken resistance around the 50% Fib and .8800 major psychological handle would hold as support.
However, I did spot a bullish divergence materializing later on, adding confirmation that buyers are ready to get back in the game and possibly push price back up to the swing high at .9300. Now this is a mega long-term divergence, which is rare, and that makes it more potent as a bullish signal.
So far, sterling appears to be extra sensitive to Brexit-related updates, especially since it’s becoming more and more apparent that the U.K. government is on shaky footing when it comes to negotiations. Prime Minister May’s recent speeches have failed to bolster confidence that the U.K. can get the best deal possible and make the best of Brexit while the BOE FPC has acknowledged the risks this breakup poses to British banks and businesses.
Meanwhile, the euro has had its fair share of dips due to the political uncertainty stemming from the Catalan elections. While the polls’ constitutionality is still up for debate, the results showed an overwhelming support for independence and could set a precedent for other European cities seeking to stand on their own as well.However, the shared currency still has a better hand to play when it comes to fundamentals and monetary policy expectations. Although the latest flash CPI readings dented ECB tapering hopes, most of the medium-tier reports and leading indicators from the region continue to reflect improvements.
On the other hand, the U.K. is two for two with its PMI misses, first with the manufacturing sector then with the construction industry. The services PMI is still coming up and another disappointing read could lead pound bulls to rethink their BOE rate hike forecasts.
With that, I’m inclined to sit on my hands and wait for the services PMI to be released first before taking any positions on this pair. Analysts are projecting no change in the earlier 53.2 reading. If the results fall short, I could hop in a long position at market and aim for the swing high as my ultimate target. I’ll set my stop below the lowest Fib and .8700 major psychological support for roughly 2:1 in return-on-risk.
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