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Day two: our potenial EUR/GBP trade

Potential strategy: buy EUR/GBP at 0.8360, stop at 0.8315, and target 0.8420.

EUR/GBP has broken above and closed above key resistance at 0.8350, which was the top of the years range, the 61.8% retracement of the October to November sell-off and double bottom neckline.

Since the pair started a series of lower lows from the July high of 0.8769, we’ve seen all counter-rallies reverse on every occasion at the 61.8% retracement of the prior move, so the break of 0.8350 could prove to be significant if sustained. The double bottom target comes in at 0.8530.

It’s also positive to see the break of the wedge pattern, and while I am targeting a move in the coming weeks to the 200-day moving average at 0.8426, the target provided from the wedge pattern would be significantly higher.

So the price action certainly suggests further upside, but the one concern I have is stochastics are at very elevated levels. This could suggest a pullback so there is a risk to the trade, but given the trend, pullbacks look like a buying opportunity.

Fundamentally one would probably be more bullish on sterling given the market is expecting rate hikes at some stage in Q1 2015.

However, we have a seen a number of BoE members talking down the pound of late, although we have also heard reference from a number of ECB members about the desire for a weaker EUR as well.

What is important here though is the equity market. Historically traders have looked at the spread between UK gilts and German bunds, however this link is now broken and traders are looking more closely at the strong performance of the Spanish, Italian and Greek bond markets, while investors are still preferring the European equities above all other developed markets.

This seems key right now, especially with projected EPS (earnings per share) expected to grow higher than that of FTSE stocks.

EUR/GBP

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