What’s up forex fiends!? Going with a super simple technical setup this week with a potential breakdown in a major currency cross pair. Check it out!
Major Support Break on EUR/GBP?
It doesn’t get much simpler than this with this breakdown of the .8700 – .8800 area on EUR/GBP, which has been a strong reversal level in favor of the bulls going back to the fourth quarter of 2017. This is also potentially a breakdown of a consolidation range that the pair has been in, going between .8700 – .9000 in the last six months or so.
The recent breakdown is likely contributed by cautious rhetoric from the European Central Bank on inflation and including sentiment that “the prudent, persistent and patient monetary policy approach followed by the Governing Council so far is fully justified.” This basically means the recent positive growth in Europe isn’t going to have the ECB go ham on the monetary policy tightening buttons just yet, something euro bulls have been anxiously waiting for.
On the British pound side of the pair, the BOE has been more hawkish on monetary policy, with recent comments coming from BOE MPC member Ian McCafferty saying that the BOE “shouldn’t dally when it comes to tightening policy modestly.” We’ve also seen an easing of Brexit jitters with expectations set by Brexit Secretary David Davis that they may have a working for Brexit deal by October.
And coming up within the next couple of weeks, we’ve got U.K. inflation and the preliminary first quarter GDP reads to spark some Sterling volatility, as well as flash PMI readings and the ECB monetary policy meeting to get euro traders moving through the rest of April. I don’t see these events really changing the recent drivers of monetary policy divergences for this pair, so I’m inclined to go with the momentum for now.
But with the stochastic signaling potentially oversold conditions, I’m going to wait for a bounce before hopping in short. My usually stop of the weekly ATR levels should be enough room for the trade to breath, and my target will be the major support area that held between the Summer of 2016 to May 2017 for an attractive potential return-on-risk. Here’s what I’m doing:
Short half position EUR/GBP at .8700, max stop loss at .8810, max target at .8400 for a starting return-on-risk of around 2.72
I’ll be risking only 0.5% of my account on this position and as usual, I’ll look to maximize the trade by keeping the trade open and adding to my position/roll stop down if the conditions continue to favor the British pound at my target.
Of course, I’ll look to close out quickly if conditions or data changes back in favor of the euro. Stay tuned and 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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