Going with another trending play this week, this time on the recent strength in Sterling vs. the euro. More bounce ahead for a better entry?
EUR/GBP Downtrend Short
It’s been a great ride for Sterling bulls lately, thanks to the Bank of England letting the market know last week that a tightening is in the works. But now that we’re in a new trading week, we’re seeing some pullback in the market, which of course brings on the question of whether or not to play the momentum lower.
On the longer-time frame, the idea of the BOE hiking gives Sterling the edge over the euro as the ECB is speculated to continue their easy money policies for now. On the shorter-time frame, we do have economic data ahead that could affect the pair, most notably the U.K. retail sales data. The latest European Sentiment data hints that we’ll get a weaker read from the retail sector, as shown on our economic calendar with the core retail sales number forecast to come in at 1.4% vs. 1.5% previous.
After U.K. retail sales, the following European PMI data on Friday is expected to mostly tick lower, which could draw in euro sellers and keep EUR/GBP from rising beyond its normal volatility ranges.
With these expectations, I think there is a little more bounce ahead, but if the market does get up to the potential resistance area marked on the one hour chart above, the swing and longer-term players could take another shot at trying to play the downtrend momentum.
So, I look to short in that area, conservatively right in between the 200 SMA and 100 SMA to give the idea enough breathing room for the data to play out. My stop will be my usual one weekly ATR stop and I’m keeping my targets flexible because of the momentum, with the first adjustment around one weekly ATR from my entry. Here’s what I’m doing:
Short half position EUR/GBP at 0.8935, max stop loss at 0.9155, initial target at 0.8715 for a 1:1 return-on-risk potential.
I’ll be risking only 0.5% of my account on this position and again, looking to make adjustments if my first target is reached.
As always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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