EUR/GBP Short- High Event Risk Scalp

As the Greek crisis continues to take center stage, we thought it appropriate to attempt a play at the extraordinary volatility seen in the euro cross pairs as of late. A glance at a daily chart sees the euro paring some of the losses sustained last week as traders jettisoned the single currency on fears of a possible default. Although Prime Minister Papandreou did pass the vote of confidence, investors now look to Wednesday's parliament vote on the 5-year austerity packaged agreed upon by the PM and EU/IMF inspectors. But division seen among opposing parties and rioters taking to the streets, some have postulated that with such a slim margin seen supporting the plan, a failure to pass the measures could prove devastating for the euro currency.

A look at a 4-hour chart sees the pair continuing to consolidate into a wedge formation as recent weakness in both the euro and the sterling sees the exchange rate remain range bound. However with today's surge in the rate, traders have the opportunity to gain better short entries as bias on the trade remains bearish ahead of Wednesday's Greek austerity vote.

Today saw the EUR/GBP pair test the upper bound trendline of the wedge formation, it's third failed attempt to breach the level since June 8th. Preferred short entry targets are eyed at the upper bound trendline backed closely by the June 22nd high at 0.8950 and 0.9880. Support profit targets are held at the 23.6% Fibonacci extension taken from the June 8th and 22nd crests at 0.8895 followed by 38.2% extension at 0.8855 and 50% extension at 0.8825. Although the 2-hour average true range stands at just 19.50, profit targets on said scalp remain between 15-20 pips as the pair is expected to see some added volatility on account of this week's economic docket. Note that the scalp will not be active until a rebound off of the upper bound trendline or a confirmed downside break below 0.8920. Once the scalp is active the levels will remain in play until such time when either of the topside/bottom limit targets are compromised or ahead of event risk later tomorrow.

Key Thresholds

A daily RSI read of 61.78 suggests risk to the pair remains to the downside as a look back sees the indicator unable to breach the 65-level for the past two months. We reckon a breach above the topside limit at 0.8980 negates the bearish bias on the trade with such a scenario eyeing the topside break-targets at the 0.90-handle and 0.9040. Likewise a break below the bottom limit at 0.8825risks further losses for the euro with subsequent floors seen at 0.8795 followed by the lower bound trendline and the 76.4% extension at 0.8760.

Related Economic Data Releases

Event risk for this specific trade is elevated with German consumer confidence figures and UK GPD data on tap overnight. German confidence is seen tapering off slightly with the GDP print expected to pose a higher risk to this scalp. Consensus estimates call for the data to mirror the previous release with a print of 0.5% q/q, and 1.8% y/y. Should the data come in below forecasts, the pound would likely come under heavy pressure as traders began to factor in additional monetary easing measures as hinted by BoE officials last week. The data is followed by joint testimony from voting MPC members on the May quarterly inflation report and again has the potential to shift interest rate expectations if the members cite increased concerns regarding rising inflationary pressures. The implications would be further sterling losses and has the ability to upset our bias. Traders should refrain from holding the scalp through the announcement as excess volatility may risk triggering stops. With that in mind, should the range hold post-interest rates, the scalp may be resumed once market noise has cleared and the sentiment is clearly defined.

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Written by Michael Boutros, Currency Analyst for DailyFX.com

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