Clear divergence in EUR/USD was seen between price and the RSIs in July. Divergence is a signal to technically-focused traders that a reversal is due, where price makes a lower low, but the RSI makes a higher low.
The pair also made a higher high on Friday as the short squeeze I had positioned for came into the market.
Data is fairly thin on the ground in Europe this week, however the key release in the UK is the Bank of England’s quarterly on Wednesday (19:30 AEST), while unemployment will also be in focus. The key though behind the inflation report will be around whether the BoE revises the estimate of slack in the economy from 1% to 1.5%, potentially down to 0.5% to 1%. This could give sterling a boost and poses a risk to my potential trade idea, however I feel the market is pricing in as large degree of tightening.
On the positioning front speculative funds increased the net short positioning last week to now hold a net positioning of 129,000 contracts. This is the largest since August 2012, although that was registered on Tuesday, so presumably it would be slightly lower now.
I feel that EUR/GBP could squeeze to the 38.2% retracement of the March to July sell-off at 0.8075, and would look to switch into short positions around here. Geopolitics in Europe will naturally have ramifications here though.