The start of the trading week has two stories so far for the euro. The first was the relatively positive Sunday release of the bank stress test results. The key highlights from the review of 130 banks, including each banks finances on assessing loans, collateral and capital; was that 105 banks passed and 25 banks failed. Of the banks that failed, only 8 banks need more capital, a total of 6.4 billion euro that needs to be raised within 9 months. The second important headline was German IFO Business Climate. This reading came in at 103.2, much lower than the expected 104.6, and more importantly proof that Germany remains under pressure as this reading marked the sixth consecutive decline. If Germany continues this weakening trend, we may see the ECB purchase government bonds and that would most likely break the euro. Expectations are for German fourth quarter to GDP to come in flat.
EUR/GBP opened slightly higher to start the week, but was unable to break above last Friday’s high which is the .7900 handle. The selloff that occurred after the 5am German release respected the .7850 level. Currently on the daily chart shown above, price remains in a downward channel and is still respecting .7872, which is the 61.8% Fibonacci retracement of the end of September low to this month’s high. If we see a daily close below that level, we may see further downside target the .7800 handle. Upside may be capped by the 50-day SMA at .7912.
The trade: Sell EUR/GBP at .7877, with a stop loss at .7907 and a take profit at .7817. The Risk/Reward Ratio is 1: 2
Edward J. Moya
WorldWideMarkets Online Trading