Is It Time To Go Long EUR/GBP?
During Monday's Sydney session, we noticed a second EUR/GBP Ichimoku signal confirmation on the daily time frame. Is this good enough to develop a trading strategy around it?
1- Technical Points
Daily Time Frame: After hitting a support at 0.8350 back in April, the EUR/GBP pair forming higher lows at 0.84 and 0.8525. While the pair opened above the daily Ichimoku cloud on May 18th, due to high fundamental volatility it reversed during the trading day.
However, on Monday's Sydney session, we had a definite EUR/GBP Ichimoku signal confirmation as the pair opened with a gap above the daily cloud. Now it is important to note that the future cloud is flat and in red territory. The Tenkan line crossed above the Kijun line beginning of May. We do not have the 3rd Ichimoku Kinko Hyo confirmation at the time of writing. Based on our Ichimoku Secrets strategy, the correction could be an interesting time to open a long position for traders with medium to high-risk tolerance.
(Click on image to enlarge)
EUR/GBP Ichimoku Signal Confirmation
Monday's opening price falls right on the 61% Fibonacci retracement level. Support is set at 50% Fibonacci at 0.8559. Immediate resistance is at 0.8684.
Monthly Time Frame: This is where things get interesting. On the monthly chart, EUR/GBP has formed a definite bullish engulfing right above the monthly Ichimoku cloud.
(Click on image to enlarge)
EUR/GBP Ichimoku Signal Confirmation - Monthly Chart
The future cloud is moving upward. Is it trying to give us yet another EUR/GBP Ichimoku signal?
2- Fundamental Points
The second point is that we suggest looking at the economic and political developments that could impact the currency pair.
EU Side: French election results really boosted up confidence in the EU and therefore the Euro crosses. To top that off, economic data continues to improve.
Market-implied odds of a rate hike by the end of the year are up to 34%, according to overnight index swaps. However a hike isn’t likely as long as the ECB continues to buy bonds under its asset purchase program, so markets are instead starting to discount a change in the language the ECB uses to describe the path of its interest rates, as well as another step down in its bond buying program.
Data out of the Euro-Zone has been strong, with the Euro-Zone Citi Economic Surprise Index at +59.5 on May 19 versus +49.3 a month ago. Likewise, medium-term inflation expectations have barely moved over the past month, with the 5-year, 5-year inflation swap forwards closing last week at 1.597% from 1.610% on April 21.
Coming up: Not much. Only German Ifo Business Climate on Tuesday, and ECB President Draghi's speech on Wednesday in the next couple of days.
UK Side: The Bank of England kept UK interest rates unchanged at 0.25 per cent in May. It then went on to cut 2017 growth forecast a bit and sent mixed signals on the future pace of interest rate rises. These are all ahead of next month's general election.
Then they released strong Consumer Price Index (CPI) which is a key indicator to measure inflation and changes in purchasing trends. The UK's inflation rate rose last month to its highest since September 2013. It now stands at 2.7% - up from 2.3% in March - and above the Bank of England's 2% target. The main reason was higher air fares, which rose because of the later date of Easter this year compared with 2016.
Last but not least, the UK's unemployment rate dropped from 4.7% to 4.6% in the three months to March 2017. That’s the lowest reading in 42 years!
With that, we have a few mixed signals on the UK end.
3- Market Sentiment
Market sentiment analysis is the 3rd point of the IDDA. Retail trader data on Friday showed that 38.5% of traders are net-long the EUR/GBP. The number of traders net-long was 27.0% lower from the previous week, while the number of traders net-short was 14.7% higher from the previous week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/GBP prices may continue to rise. Traders are further net-short than last week, and the combination of current sentiment and recent changes gives us a stronger EUR GBP-bullish contrarian trading bias.
Trading Strategy Upon EUR/GBP Ichimoku Signal Confirmation
Here are calculations for important approximate levels to keep an eye on:
Support Levels | Turning Point | Resistance Levels |
---|---|---|
0.85 | 0.8559 | 0.8684 |
0.8559 | 0.8611 | 0.8749 |
For more free insights from Invest Diva, click here
Disclaimer: Click more