The recent intensification of global-growth concerns has seen EUR supported via its inverse correlation with risk, with carry trades and hedges being unwound as Equity markets cascade. Reports that many members of the ECB are no longer in favour of further easing is also prompting an unwinding of easing expectations seeing EUR supported further still. This same risk-off sentiment that sees EUR supported is weighing heavily on Sterling which recently tends to trade lower during risk-off periods as its status as a European carry trade target sees positioning unwound. Several other factors are also contributing to Sterling weakness currently: the investor uncertainty surrounding a possible”Brexit”, poor UK economic data and diminishing UK rate-hike expectations.
As short positioning in GBP becomes saturated, the move is vulnerable to a squeeze and with catalysts for further downside seemingly sparse until the BOE’s inflation report in February, I prefer to look for opportunities to position for a correction, choosing EURGBP as my vehicle. Further EUR strength is likely to be met with Dovish rhetoric from the ECB despite concerns over their commitment to further easing.
Trade Of The Week Idea
The base in EURGBP has developed nicely and price has now broken above the key .7480 area resistance paving the way for a test of the .7750/78 area where I would look for the broken 2012 and late 2014 lows to act as resistance, with the 50% retracement from the 2013 highs sitting just above, capping the move for at least a retest of the 74.80 area breakout zone.
- I Will be monitoring price action at a retest of the .7750/78 area resistance area, looking to sell in line with the overall bearish channel price is trading in with a stop above 79, targeting a move initially back into the .7480 area.