Steering Clear of Euro Risk- GBP/CAD Presents Scalping Opportunity

With the extraordinary events unfolding in Europe, today's scalp attempts to quarantine traders from excessive risk-taking in the euro and swissie cross pairs. A look at the GBP/CAD daily chart sees opportunities for traders to scalp downside moves after failing to breech the upper bound trendline dating back to the January 2010 highs. Today the Bank of England's Paul Fisher cited that the fragile domestic recovery could require the additional stimulus as deflation becomes more of a concern for policy makers. He noted that “if inflation gets too high, we know what to do,” but if deflationary pressures become more prevalent, it is unclear that the central bank will, “have sufficient ability to get out of that very easily.” Today's comments suggests that officials continue to see weakness in the real economy as higher interim inflation and sluggish growth prospects give rise to stagflation concerns. The dovish remarks subsequently weighed on the pound which was worst performer against the greenback at the US open.

The loonie's rally today was fueled by a pickup in risk appetite as gains in stocks and commodities saw investors optimistic that the today's Greek vote of confidence will pass. Accordingly our bias on this scalp is bearish, noting the GBP/CAD pair broke below the converging 50 and 100 day moving averages around the 1.5820 level.

A look at more recent price action sees the pair testing the lower bound trendline of an embedded descending wedge formation dating back to the April 1st lows. Interim support lies just above, at the 50% Fibonacci extension taken from the Feb 23rd and May 27th crests at 1.5765. Preferred short entry targets are eyed at 1.5795, backed by 1.5820 and the 38.2% Fib extension at 1.5850. Support profit targets are held at 50% Fib extension at 1.5765 followed by 1.5740 and 1.5720. With a 2-hour average true range of nearly 30pips, profit targets for said scalp should be between 18-26 pips depending on entry. Note that the trade will not be in play until a rebound off of the 1.5795 resistance target or a confirmed break below the 50% Fib extension at 1.5765. Once the scalp is active the levels will remain in play until such time when either of the topside/bottom limit targets are compromised.

Key Thresholds

A daily RSI read of 46.65 suggests the pair sees further downside potential as the indicator slopes steepens after failing to crack the 70-mark to the upside since last month. We reckon a breach above the topside limit at 1.5850 negates the bearish bias on the trade with such a scenario eyeing the topside break-targets at 1.5890 and 1.5910. Likewise a break below the bottom limit at 1.5720 risks further losses for the pound with subsequent floors seen above the 61.8% Fib extension at 1.5680 followed by the 76.4% extension at 1.5570.

Related Economic Data Releases

Traders are encouraged to refrain from holding positions through the Greek announcement expected this afternoon at 21:00GMT as thin trading conditions could see a spike in volatility on the release. That said, event risk for the pair is rather negligible with no economic data of note expected from either sovereign, save the Bank of England minutes at 8:30GMT. Although the minutes are expected to reiterate Fisher's concerns, the sterling could potentially see some added volatility and accordingly traders should be mindful of the release. An unlikely hawkish outlook would immediately trigger strength in the sterling, with such a scenario invalidating our bearish bias, with topside resistance targets now used as profit limits on long positions.

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Written by Michael Boutros, Currency Analyst for DailyFX.com

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