EURGBP Rebounds
The EURGBP currency pair flirted with the 0.90 level for quite some time now. Over the past two months, it could not break decisively higher, nor lower.
One of the explanations for such hesitation comes from the world’s reserve currency – the USD. When the USD is in a strong trend (bullish or bearish), the two majors, EURUSD and GBPUSD, move in a closely correlated manner. Hence, the EUR to GBP cross’s volatility declines significantly.
But such price action seems to have come to an end now.
The EURGBP broke a triangle that acted as a reversal pattern. As a result, a move to 0.87 is in the cards.
It appears that the Euro peaked last week. During the NFP week, it made a new high above 1.19 and then quickly retraced.
Troubles in Turkey may be the catalyst for a stronger move lower for the Euro. The TRY steady decline against the USD affects the performance of European banks with exposure in Turkey. While the exposure is not at similar levels like the ones in 2008, some Spanish and French banks do run large businesses in Turkey. If the USD continues to outperform against emerging markets currencies and starts gaining against G10 ones, the EURUSD decline may accelerate. On its way down, it could drag the EURGBP lower.
Whenever a triangle forms at the end of a rising trend, traders focus on the potential break. If it breaks lower, the pattern is a double combination.
The implications are that the price fully retraces the double combination. Therefore, a move back to 0.87 is in the cards now that yesterday’s close broke the lower edge of the triangle.
For the stop loss, use the previous swing in the triangular pattern. This way, the risk-reward ratio is more than sufficient for the trade to make sense, as the reward exceeds the risk by a ratio of 1:4.
