The EUR/GBP pair fell during the session on Tuesday as the Euro fell in general. This particular pair has been more interesting to me than the EUR/USD pair because of the fact that the difference in the currencies is far starker than the other market. One of the biggest mistakes Forex traders make is to focus solely on whatever market has the most drama surrounding it, and without a doubt the EUR/USD is that particular pair.
However, this pair has been interesting because it has provided an opportunity to play and inefficiency in the marketplace. The European Central Bank has agreed to buy an unlimited amount of three-year bonds from various countries if they are willing to ask for the help. On the other side of the English Channel, the Bank of England seems to be relatively happy with its monetary policy and shows absolutely no signs of quantitative easing. With this being said, over time the British gilts market should continue to show favor over the various European bonds. This should send money into the United Kingdom as many in the financial markets are going to be somewhat leery of the continent.
0.80 In focus
For me, the 0.80 handle will tell the entire story for this currency pair over the course of the next several months. We fell on Tuesday, and fell hard. However, we still have the support area of the 0.80 handle in place, and it needs to be supportive for the buyers to come out on top.
For myself, I believe that short covering had a lot to do with the rally we've seen recently. Obviously, there is less fear of a European break up at the moment, and this of course would have money flowing into Europe as well but this can only last so long as the economic outlook for the continent looks fairly bleak. After all, Europe is in a recession or at least going into one.
If we can close below the 0.80 handle on a daily chart, I would not hesitate to start selling as I think this would show a resumption of the massive downtrend we've seen for the last year and a half or so. If it does show support, the 0.80 handle could eventually end up being the launching point for a massive rally. Because of this, I will be watching this pair very closely.