Top Trade Idea For March 18th, 2014 – EUR/GBP

Although the EURGBP pair lacks the volatility and extreme moves that are associated with say the USDJPY pair, it does offer a degree of predictability in terms of the overall trend.

Price action was anchored in a bearish channel for 6 months with the euro shedding some 7% against the pound in the main due to speculation that the BOE will be the first to tighten monetary policy. This fairly predictable range was breached last week which resulted in a strong run for the euro to a 3 month high at 0.8380p

In so many respects, the UK economy is well ahead of the Eurozone bloc when it comes to getting back on track and recent reports suggest that the British economy will surpass its 2008 peak this summer.

Overall, one would think that this would make for a much stronger pound yet the lack of action from the ECB at its most recent meeting despite encouragement from the IMF to either cut rates or embark on some form of QE has seen the single currency rally against both the dollar and the pound.

The lower than expected inflation data for the bloc yesterday may well incite some degree of action in the near term however and should the ECB stop sterilizing the current bond purchases in order to inject liquidity into the interbank market then we could expect to see the euro trade lower. Add to this the fact that a strong euro does not correlate well with growth – particular for the Eurozone member states that depend on exports.

There has been something of a theme in the aftermath of a hawkish Draghi press conference in that other policy makers try to neutralise this nascent strength in the euro by making ineffectual comments about the various tools the ECB can use should disinflation take hold.

Over the past month the euro has gained almost 3% against the pound and as I write, the price action is testing 0.8370p which is the 50% retracement from the late October highs of 0.8585 to the most recent lows of 0.8158p. Strong resistance lies at the 0.8390p level with the 200DMA at 0.8424p residing not far above.

The confluence of the uptrend from the July 2012 lows adds to strength in upside resistance.

With the 10 day RSI making a move towards 70, the currency looks set to register an overbought and one could expect that we may see an element of profit taking take hold shortly.

I would look to sell at or near current levels with a stop loss at 0.8425p and a downside target of 0.8292p – giving a risk reward of 2:1