The EUR/GBP - Pound from A Different Perspective
After the breakout in the EUR/GBP this week and its completion of the large quarter from 0.8750 to the all-important 0.9000 level, my interest has returned to this pair. The fundamentals are in line and the technical price action is moving accordingly. So now that the market has returned to the 0.9000 price level, is it too late to jump on the bull train?
THE FACTS
- Technically, price is very bullish with the markets closing the trading week on Friday well above 0.9000 at 0.9044.
- Calculating the Fibo retracement levels of Friday’s move on the 10 minute chart, a drop back towards the 0.09020 level would be normal and healthy development of such a large move. However, studying the daily chart, one can see that that deep of a pullback has never happened when the rally is strong and still continuing.
- On Friday, price did not make it beyond the 75 pip hesitation zone that I like to watch with a high of only 0.9044 on Friday. But that price exhaustion is completely expected for an end-of-the-week move like that. If this rally is for real, expect price to break and hold above 0.9075.
- The fundamentals are the real buttresses of this rally. The markets have received positive UK data with a rising GBP. Manufacturing is showing some pick up while even the delicate housing sector in Great Britain seems to be stabilizing with rising house prices. But the forex markets take its lead from the central banks and Bank of England governor Mervyn King made it quite clear that he remains bearish on the British economy and monetary policy shall reflect that bearish perspective. The GBP remained weak on the news but it was the news of Lloyds Banking Group failing financial stress tests, thereby loosing participation in the government’s stimulus program that really shook the markets and sent GBP reeling on Friday. A bearish BoE really weakens the GBP for the short to medium term.
- The Eurozone, on the other hand, has been a surprisingly resilient during this economic crisis. Politically, compared with the UK and the US, European stimulus packages have been rather small. Merck and Sarkosy have taken strong stances against expanding current stimulus beyond already seemingly paltry levels. Monetarily, the ECB has also been staunch in using very small incremental rate cuts and now the interest rate stands highest in the West at 3.00%. The interest rate is the strongest peg the euro is standing on and it has appreciated accordingly. If you zoom out the daily chart, the euro appreciation has been crazy in such a short time.
- The economic data out of the EZ has also seen surprises with rising GDP and a pick up in manufacturing and inventories much in line with global economic story.
- Watch the calendar. UK house prices will help set the tone for the trading week before the highly anticipated release of the BoE meeting minutes. These minutes should reveal just how dovish the BoE is; so seeing how markets react will be interesting. FOMC on Wednesday will influence the dollar counterparts. Between the EUR/USD and GBP/USD, whichever pair is reacting excessively in terms of price action will be the currency that has the edge in the EUR/GBP. It will be an interesting week with US home sales, German IFO, French GDP, and Italian retail sales rounding out the calendar.
THE COMMENTARY
Again, INTERESTING WEEK! The EUR/GBP is in brand new territory as this pair is at all-time highs. We could keep going or we could retrace a little. To be honest, I wouldn’t mind a little retracement. The trend is your friend only when you can get out in front of it. I count waves a little differently than most traders so I don’t like to put in facts but I count a first bullish wave on the daily chart. That is increases likelihood to me of a trend that is strong enough to at least attempt to continue on towards 0.9250. If GBP/USD confirms with a move below 1.6250 towards 1.6111 support, even at these levels I’m bullish EUR/GBP. I think the BoE gave the markets just the reason to grant the euro parity with sterling. And it is possible that economic data out of the UK begins to show the very thing the BoE has been worrying about. Having had a premium over most (dare I say all?) currencies for decades now, GBP has a long way to fall down before stabilizing. Very interesting feat WHEN that happens.
Then’s there the case for the shorts. We ARE at the top of a 4-day old rally. How much more can this slow mover move after already making a brand new all-time high. A strong case is made for a move lower before any continuation of the up trend. So this train of thought begs the question: Can the GBP rally? We’ll find out on Wednesday.
As always, trade what you see, not what I think.
