EUR/GBP: Short Trade Setup Sought
Dailyfx | Aug 27, 2015 01:54AM ET
Talking Points:
- EUR/GBP Technical Strategy: Flat
- Euro Recovery Stalls Below June Top Against the British Pound
- Short Trade Sought But Risk/Reward Parameters Call for Patience
The euro paused to consolidate below the 0.74 figure against the British pound after recovering to the highest level in close to four months. The pair launched a sharp move higher as evaporating risk appetite across financial markets fueled an unwinding of stretched short-EUR positioning. Indeed, the correlation between EUR/GBP and the Euro Stoxx 50 index of blue-chip Eurozone shares is now 0.94 on rolling 20-day studies.
Near-term support is at 0.7291, the 23.6% Fibonacci expansion. Breaking below this barrier on a daily closing basis opens the door for a test of the next downside inflection point at 0.7210, the 38.2% level. Alternatively, renewed upside momentum that brings prices through resistance marked by the June 4 high at 0.7385 clears a path for a move to challenge the May 7 top at 0.7482.
On balance, the dominant long-term EUR/GBP trend favors the downside. This suggests the recent recovery is corrective, painting it as an opportunity to enter short at a more compelling level rather than a bullish reversal with follow-through to buy into. With that said, prices are too close to support to justify pulling the trigger on a trade from a risk/reward perspective. As such, we will stand aside for now until an actionable setup presents itself.
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