Both the U.K. and Eurozone are facing economic challenges, albeit differing ones. However, we expect the euro to outperform the pound sterling.
Here are a few fundamentals to consider.
First, Brexit cost the U.K. billions in lost trade and tax revenues.
Second, while the European Union's GDP rose by 0.4% in April having increased 0.3% in March, the UK's slowed down unexpectedly, contracting by 0.3% after already falling 0.1% in March.
Finally, the ECB said it would join the interest rate party next month with a hike. That would be quite a significant move since EU interest rates have been negative for quite a while.
Also, the technicals favor the EUR over the GBP.
The pair completed a bottom, with the 200 DMA as the natural neckline. Since then, the price completed a bullish triangle, coinciding with a Golden Cross, as the 50 DMA crossed over the 200 DMA.
The EUR/GBP recently reached its highest since early 2021 and found resistance by the 100 and 200 weekly MAs. Note that the top of the range perfectly coincides with the 200 WMA, underscoring the importance of the price level. If bulls can push it over the 0.8730 level, it will create a significant bottom. Both the MACD and ROC believe the price will bottom.
If the pair overcomes the 0.9500 level, it will have created a gargantuan continuation pattern and trade along its rising macro channel from the single currency's inception in January 1999. The RSI bottomed ahead of the price range since early last year, and the MACD triggered a buy signal in the long term.
Trading Strategies
Conservative traders should wait for the price to decisively overcome the range since early last year and the 200 WMA.
Moderate traders could wait for a return to the uptrend line, at least the closer one.
Aggressive traders can enter a contrarian short if the price revisits the range top before joining the rest of the market's long position.
Trade Sample 1 - Aggressive Short Position:
- Entry: 0.8700
- Stop-Loss: 0.8725
- Risk: 25 pips
- Target: 0.8600
- Reward: 100 pips
- Risk-Reward Ratio: 1:4
Trade Sample 2 - Moderate Long Position
- Entry: 0.8600
- Stop-Loss: 0.8575
- Risk: 25 pips
- Target: 0.8700
- Reward: 100 pips
- Risk-Reward Ratio: 1:4
