Considering Long EURGBP [Free Forex Newsletter, May 11]

This trade idea was first sent to subscribers of the Free Profitable Forex Newsletter on May 11 2022.

Considering Long EURGBP After Bullish Breakout Last Week

The dovish message from the Bank of England last Thursday crashed the pound in the Fx market. While GBPUSD is consolidating due to the broader consolidation in the dollar, the pound is weakening more notably against other currencies, underlining the importance of the shift in the BOE’s policy stance. In regards to this, EURGBP looks particularly interesting as it completed a weekly bullish breakout on the BOE announcement, suggesting it could have been an important turning point for the pair. 

For instance, the primary fundamental driver behind the steady downtrend in EURGBP for the past 12 months was the more hawkish BOE relative to the ECB. Now that the BOE has clearly shifted to a more dovish stance, it leaves the pound vulnerable to further losses. At the same time, ECB communication is getting more and more hawkish (or perhaps better said, uncomfortable) as a result of the high inflation in the Eurozone. Thus, last week’s breakout in EURGBP could finally be a reversal, as we may be entering a period where the ECB will be more hawkish relative to the BOE.

Bullish breakout on weekly chart and a higher high

Last week, EURGBP completed a bullish breakout of the 1-year downward channel. There were many previous attempts at this resistance line, but the weekly close never got above a previous swing high. This time it did, and the weekly candle also closed strongly in the green.

The fact that the technical break came right on the BOE meeting last week is perhaps another sign that this time the breakout is genuine. In the Fx market, a strong fundamental catalyst is usually needed to break an important support/resistance zone that has been holding for such a long time. The Bank of England meeting could be that catalyst in this case.

An inverse head and shoulders is also worth mentioning. It is not the perfect-looking pattern, but it is a head and shoulders, nonetheless. EURGBP broke this neckline too last week. The projected target to the upside is at the 0.88 zone.

Trade Plan

Despite the upside breakout and bullish change in the fundamental dynamics, we should be watchful for consolidation in EURGBP too. There are signs this is already happening, and if EURGBP retraces a little more, it could provide us better levels to enter long. Going long at lower levels will also allow for a tighter stop; hence this seems like the preferable approach in the current technical circumstances on EURGBP.

Look for a move back toward the broken resistance zone and for a retest there. It is also located at the 0.8450 zone, which is also a Fibonacci confluence area, and is likely to act as a key support zone (see chart below). If EURGBP comes back to retest it, some reaction here seems very probable. Thus, such a scenario could be an attractive opportunity to enter long.

Entry:

• Look for dips below 0.85 and then for potential bullish signals to enter long;
• The 0.8450 zone is strong support, so it is the optimal area to look for long entries

Stop loss:

• Below 0.8400

Targets:

• 1st - 0.8700
• 2nd - 0.8800 zone

Trade signals from the past weeks

• May 02, 2022 - Long USDJPY from 130.10 (open in progress); trade idea sent April 28

TOTAL P/L in the past week: N/A

TOTAL: +5540 pips profit since October 1, 2018