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EUR/GBP is in a strong downtrend, having fallen 3.9% from the August pivot. We feel selling rallies makes sense given the trend and believe traders could look to put working orders below the 38.2% retracement of the 0.8654 to 0.8392 at 0.8492 move. Traders could look to place stops above the 61.8% of the mentioned move at 0.8554, which would protect the trade in case our idea proves incorrect.
Looking at the daily RSI, MACD and stochastics, these indicators all suggest the pair is oversold and thus could feasibly see short covering, which if it were to materialise would push the pair to our entry point.
The April low of 0.8398 is finding good buying activity and we would also suggest initiating short positions on a daily close below this level of demand.
Fundamentally we feel the price action fully reflects the diverging views of the BoE and ECB. The BoE seems to be relatively happy with sterling at present and has provided no indications that it will look to add liquidity to the market. Data has been strong of late, with manufacturing, services and construction activity all picking up markedly.
European data has also been improving, but is not at the same levels as the UK, and it is clear the UK economy is looking in much better shape than its European counterparts. The ECB gave hints that the pace of the improvement in data may slow and even mentioned adding liquidity to the markets. Presumably this would take the form of an LTRO (longer-term refinancing operation) and thus with banks borrowing cheap liquidity from the ECB, the EUR should fall as the ECB’s balance sheet expands.
Data out this week is modestly tier two and thus should not cause a huge amount of volatility. In the UK, the highlight will be jobs numbers. European data should keep traders busy, with GDP figures in Spain and Italy, industrial production reports in France and Italy and Spanish unemployment.
We also like the fact that the pair effectively removes the risk on, risk off thematic and also takes little influence from the Fed tapering debate.
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