How EURGBP Holds During Correction

When the EURGBP trends, it tends to hold the 50% Fibonacci level to the pip. In fact, a break of the 50% Fibonacci level tends to signal a reversal of the trend with price action to move in the same direction of the correction. When it really trends, it will hold the 38.2% Fibonacci level to the pip. If it breaks this level, it will invariably move towards the 50% Fibonacci level.

Just a tip. When you trade a select few currency pairs, you get to know its personality. And you can take advantage of that in your trading.

EUR/GBP Struggles Below 0.84

Breaking that 0.8400 level was a monster bearish move by the EUR/GBP currency pair. The descending triangle that was forming on the weekly chart played out. Now that we are below that level the GBP will invariably strengthen. The hourly chart above is a snapshot of the end of last and the open of this new week. After gapping higher to a high of 0.8359, it is looking like a failure of the 0.8300 whole number is inevitable. The smaller Fibonacci is the move higher at market open while the bigger Fibonacci measures the start of the move on Friday at 0.8208 through the top today at 0.8359. This larger Fib lands at important levels. Keep an eye on these levels for further strength or weakness in this pair.

Fundamentally, still the market remains focused on the Eurozone… to the benefit of the Great British pound.

Update on EUR/GBP

The “breach” of the 50% Fib on the above weekly chart had no mojo at all turning into a mere price probe. The 0.8813 level provided strong resistance as price made a high of only 0.8816 and has now staged a deep pullback from that high. We’ve seen strong resistance at these Fibonacci levels before from the EUR/GBP so this price action should have been expected behavior.

That bullish chart pattern on the hourly chart also held. I was fooled by the false breakout below the rectangle’s bottom at 0.8700 to 0.8686. If it had been a sustained break below there would have been a confirmation close below the bottom of the rectangle. But price immediately regained the whole number and went on to rally to a high so far at 0.8816 in the next 2 trading sessions.

Now during the Asia session, the EUR/GBP has already staged a whopping 100% retracement of yesterday’s rally with a low on the day already of 0.8764. Though price is finding support at this level, we need to be aware of what this level of retracement means and that is a reversal of the intraday uptrend.

I am staying away from this pair at the moment. EU rumors in regards to soverign debt is really affecting the euro. Also, news from the UK is due out in a couple hours (IP and BoE inflation report). I’ll be watching the 0.8813 level. If price finds resistance again at 0.8813, I will look for price to reverse from there. On the other hand, a break of this level targets former-support-turned-resistance at 0.8954.

Trade what you see folks, not what I think.

fmfx:

Cable At Multi-Month Lows

The GBP/USD broke out today to new multi-month lows below the 1.5921 support at 1.5864. Price, then, bounced and retraced to as high as 1.5936 capped by the 38.2% Fibonacci level at 1.5941. Now into the New York close, cable has resumed its downward momentum with price back below the 1.5900 whole number.

We mentioned at the start of the week on Sunday 3 important things:

1. that as long as 1.5920 support held expect the GBP/USD to rally back towards 1.6100. Cable made a decent attempt with today’s high at 1.6066 when price made a low yesterday above support at 1.5931.
2. that it would be non-scheduled announcements that would move the markets this week. JP Morgan’s announcement stopped the GBP/USD correction rally dead in its track spurring the reversal back in the direction of the LT down trend. In addition, worries about credit quality out of Abu Dubai fueled risk aversion thus keeping the pressure on the currency pair.
3. that if support at 1.5920 was broken, then retracement was over and expect a breakout to the downside. Cable broke out 54 pips before finding support at the lows with little regard for the 1.5920 support level. Looking at the above hourly charts, the GBP/USD slid 148 pips in 2 hours.

With price staying and closing below 1.5920, now previous support, cable now targets the 1.5801 ST on its way to completing the quarter to 1.5750.

A close below the 1.5900 whole number would further confirm the weakness of the GBP/USD currency pair. With fundamentals and technicals aligned right now and price remaining 75 pips (and more) below the 1.6000 large quarter point, I am off cable short suspension! But I did take advantage of the bearish developments in the GBP/USD without trading it. Rather, I traded the EUR/GBP and now manage a long position started last week, booking 215 pips and adding on dips. With this position, I can stay away from the USD until 2010.

I do still see more weakness in cable. And I find it very interesting that the USD is now benefiting from BOTH risk aversion AND positive US fundamentals. However, trade what you see, not what I think.

fmfx:

EUR/GBP Poised to Rally Further

The EUR/GPB has been in a downward channel since making the near double top high at 0.9150 on December 3 and December 4. After 3 bearish waves, the pair made a low at 0.8848 near ST support at 0.8831 last week. Since this low, however, the EUR/GBP has made higher lows and higher highs even as it remains below the 50% Fibonacci retracement of the 3rd bearish wave (0.9047-0.8848) at 0.8958 on the daily chart. A breach of that level gives signal that this price action may actual turn into a rally rather than just mere consolidation after the low.

If you take another look at the EUR/GBP daily chart (from this article), you can recall the pair has broken the upper trendline of the LT downward channel from the 0.9410 high on October 13. Price needed to break the 0.8831 support level in order to resume that down trend. However, with price finding support before 0.8831 and now in a first bullish wave, the EUR/GBP is well poised to move higher. Resistance naturally lies at the 0.9000 whole number, large quarter point, and major psychological level. Before the whole number, price still has to take out 0.8958 50% Fibonacci level. After 0.9000, the November 12 high at 0.9062 is resistance to keep an eye on. A sustained break of this level gives the clue that the broken trendline formation is valid and a rally back towards the 0.9150 highs could come under assault. Only a break of 0.8831 reverses this bullish momentum.

As usual, trade what you see, not what I think.

I traded what I saw. I looked at this chart and it was very clear that I needed to cut my losses on my short position prior to the news. And even despite what I saw, I started to think:

• I’ll just hold to BoE meeting minutes. They could be GBP-positive… right?
• The trend is clearly to the downside. The EUR will fall apart… right?

Check out price after making the 0.8831 lows back in November. A rally quickly followed that took price to 0.9150 and broke the MT down channel. Looks VERY familiar doesn’t it to how price is behaving right now. I also see that the recent low at 0.8848 is still a higher low than 0.8831. I see all the higher highs and higher lows - the very definition of an up trend. And I see the poor UK economic data that has been released so far this week including the BoE minutes. So I did it. I pulled the plug and lost 157 pips. Still very proud of the fact that I traded what I saw. It’s one thing to see it but it can be a whole other thing to trade it.

So the EUR/GBP played me this week, as GBP strength did surprise me and I underestimated it. Thanks to increased risk appetite (for some RIdiculous reason in light of more debt defaults), GBP rallied even past 0.9054 to a low of 0.9024 - a completion of the quarter to 0.9000. And again, the pair still finds support on another attempt towards the 0.9000 level. That is a bullish development.

Secondly, price still respects the Fibonacci retracement levels on the daily charts. This makes the current levels a nice buying opportunity. Yesterday’s session, my bullishness was waning but rightfully so as intraday, the pair dropped 80 pips. I had too much risk on the table to hold my longs during that anticipated drop. Another lesson in trade management, timing, and psychology for me this trading week. I’m a better trader for it.

Lastly, I was discussing with Paul Pinfield on Twitter that the GBP can’t defy fundamentals forever. Perhaps, forever has arrived: 1) The Financial Times confirms that UK banks (5 in total) bear the biggest brunt of Dubai World’s debt, to the reported tune of $2 billion. If this plays out as true, UK equities will undoubtedly suffer and drive the GBP lower with a double whammy of increased risk aversion. 2) The ECB is up in a few hours with ECB President Trichet speaking later in the morning. They are expected to be quite hawkish and this contrast in policies with the BoE will keep this pair supported still.

So my start of the week analysis still holds with an additional target at 0.9150 - targeting ST resistance at that level. This is a good first target to unload and book pips. As I always say: Trade what you see, not what I think.

0.8950 is SERIOUS resistance. Look how many attempts were made at on the way down as it served as the upper boundary of an area of support then.

Now yesterday’s rally failed to break the 0.8950 price level and exhausted at a high of 0.8947. Technically, no real cause for concern as the pair is still consolidating. Fundamentally, if, in fact, the risk trade is causing the EUR to surge then this rally could continue. This time though, the risk trade is a little different. Rather than being driven by poor economic data, risk is being fuled by the rally in gold, oil, and other commodities that is giving traders the appetite to buy riskier assets. In fact, the USD continues to weaken despite poor US economic news that would have usually driven investors to safe-haven assets. On the other hand, the BoE just keeps getting more and more dovish. The minutes revealed a discussion on cutting interest rates. WTF?! I don’t see how the GPB can rally even in the long term until the BoE takes steps towards tightening monetary policy. I’m actually targeting 0.9000 for this currency pair. Price action at this major whole number and psychological level will be very telling.

As you know, trade what you see, not what I think.

The EUR/GBP is just sitting there! This is a 10 minute chart looking like a 1 hour chart. Ha! This market is seriously just waiting on US 3Q GDP release tomorrow morning. The market actually expects +3.2% with economists hoping for a much stronger reading. WOW! Talk about over optimistic. I actually expect a small decline. If there is growth, it will be small and, therefore, a disappointment to the markets. In this risk-dominated market environment, this will lead to a tumble is riskier assets and the EUR will weaken further against the GBP.

What Goldman Sachs and BNP Parnibas know.