Looking to sell rallies in EUR/GBP

Potential trade idea – sell EUR/GBP at 0.8240, stop loss at 0.8360, target of 0.8005.

Technically the pair is in a downtrend, as seen by the fact it is making lower highs and lows. The MACD on the daily chart is below zero, suggesting rallies will be contained within the bearish trend and the fact the ten-day RSI is at 41 shows the weakness behind the price.

Since August last year, each correctional rally has struggled at the 61.8% retracement of the previous fall, thus I feel selling rallies fit with prior price action.

Fundamentally the pair should trade lower. The BoE seem happy with market pricing at present and consensus now expects the first hike by Q1 2015, with further hikes throughout 2015. This would see the BoE as the second central bank in the developed world to hike, behind the RBNZ.

The RBA or the Federal Reserve would be next off the block in my mind, while the ECB could still look to ease in the coming months, although its current forecasts suggest they see upside risks to inflation.

In the coming meetings the prospect that the ECB cut its refinancing rate is real. A lot will depend on volatility within its money market (keep an eye on EONIA rates), as they will look to cut the refinancing rate in order to control volatility (the refinancing rate is the rate at which banks can borrow funds from the ECB).

Whether the ECB impose negative deposit rates is yet to be seen, as there are negative consequences which could impact the European economy if this materialises. Negative deposit rates effectively penalise European banks for holding funds with the ECB, and thus could result in adding costs being imposed on customers, which of course is the last thing the European economy needs right now. However I don’t feel this will be an all-out EUR negative event and it will depend on the magnitude and duration.

In terms of drivers, tonight’s European GDP print could push the pair closer to my target, especially given the market expects a strong improvement with the Eurozone group; swinging to +0.4% growth (from 0.4% in the prior read).

I will adjust stops and targets if and when the position is filled.


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