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Pairs to Range Trade

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EURGBP Offers A Range Only For The Most Risk Tolerant

Thu, Apr 2 2009, 06:02 GMT
by John Kicklighter

DailyFX

The clock is counting down to tomorrow’s heavy round of event risk and the market is clearly cautious of the potential for volatility. Realistically, there is no pair in the market that can claim to be immune to the G 20 meeting’s potential outcome; and therefore, range trades should be avoided unless there is a fundamental bias to go along with a technical setup. Our setup for EURGBP is based predominantly on (conspicuous) technicals and should only be followed by those that have a high tolerance for risk.

Why Would EURGBP Hold a Range?

• Levels to Watch:
  -Range Top: 0.9500 (Double Top)
  -Range Bottom: 0.9150 (Fib, Triple Bottom)

• It is necessary to find some kind of safety from the volatility the G 20 meeting may supply in Thursday’s session. EURGBP has a modest buffer to this event risk as both economies’ economic pace is generally dependent on one another. On the other hand, the UK has considerable exposure to the outcome of the meeting as it is expected to be the worst performing economy of the industrialized world through 2009. What’s more, we also have the ECB rate decision tomorrow – a variable that is bound to drive price.

• Since marking a double top around 0.95 two weeks ago, EURGBP has turned to congestion. Though despite the horizontal floor set in at 0.9150, it is hard to miss the potential for this chart setup to confirm a descending wedge and/or head-and-shoulders formation with a bearish breakout.

Suggested Strategy

• Long: Half sized (or smaller) entry orders will be placed at 0.9180 - notably above spot.

• Stop: Our initial stop will be set at 0.9120 to cover the triple bottom but not rising trend. To secure profit, move the stop on the second lot to breakeven when the first target hits.

• Target: The first objective equals risk (60) at 1.0.9240 while the second target will be 0.9385.

Trading Tip – The clock is counting down to tomorrow’s heavy round of event risk and the market is clearly cautious of the potential for volatility. Realistically, there is no pair in the market that can claim to be immune to the G 20 meeting’s potential outcome; and therefore, range trades should be avoided unless there is a fundamental bias to go along with a technical setup.
Our setup for EURGBP is based predominantly on (conspicuous) technicals and should only be followed by those that have a high tolerance for risk. A rational consideration of this pair’s exposure to upcoming event risk leads us to believe that there is a significant chance for a breakout. The UK and Euro Zone have different stakes in the gathering of the global policy makers.
What’s more, there is an ECB rate decision scheduled for release just before the US session open (and likely before official G 20 commentary starts to leak over the wires). Clearly this kind of event risk requires speculation on the outcome of these events and how the market will react to them. For our strategy, we have set entry above spot (this may help should volatility vanish before the event risk decides direction for us) and the stop just below the range low. As this is such a dangerous setup, it is best to minimize position size such that any losses taken will be considered acceptable. This setup will only be valid over through Thursday’s US Session. 

Event Risk for Euro Zone and UK

Euro Zone – Euro traders are looking attwo major fundamental accelerants over the next 24 hours. The impact the G 20 meeting may have on the currency is vague but has nearly unlimited potential. Euro Zone policy makers have shown resistance recently to calls by other world leaders to increase their fiscal stimulus and bailout their neighbors. So far, the region has been able to avoid much of the heavy costs incurred by the US and UK with taking on massive amounts of debt to try and spend their way out of recession. Should the those members of the European community represented at the meeting finally acquiesce to these demands, it would be treated as confirmation that conditions in the Euro Zone are as bad as they are in other economies and that growth and returns are going to suffer for far longer than many investors were hoping. A more definable threat to price action tomorrow is the ECB rate decision. The central bank is fully expected to cut its benchmark another 50 basis points to 1.00. This brings their target rate within the same realm as so many other rates that are hovering just above zero. On the other hand, the market’s forecasts may alter the dynamics of the reaction.

UK – Forecasted to be the worst performing, industrialized economy this year, the United Kingdom is heavily vested in a more liberal outcome for the G 20 summit. A coordinated effort made by the world’s largest economies could more surely revive global growth and encourage a recovery from this hard hit nation (as opposed to momentum behind the global slump overwhelming the UK’s efforts to recharge their own economy). However, this isn’t the only fundamental concern for the sterling. Looking beyond this release, we have top tier releases dotting the calendar; but it is next Thursday’s BoE rate decision that can really present a problem.

Published on  Thu, Apr 2 2009, 06:10 GMT