Shorting EURGBP on Italy's election result

EURGBP has posted a spectacular reversal on the back of the Italian election results, which could continue to cast a shadow over the currency pair and lead to significant further consolidation lower.

Trade: Shorting EURGBP in 0.8620-0.8640 area
Stop: 0.8671 bid
Targets: 0.8460 and 0.8375

Arguments in favour of shorting EURGBP

• The non-event of the UK downgrade late Friday triggered a further dive in GBP, but this was quickly reversed, suggesting that the GBP bears have gotten ahead of themselves.
• The Italian election results have deservedly generated massive uncertainty and a sudden renewal of the EU tail risk trade, which GBP has benefitted from in the past – it could benefit from this development again as it will be some time before we see any clarity on the path forward for Italy and the EU periphery.
• Technically, we have the completion of a significant wave pattern and a very climactic reversal that suggests the risk of further consolidation lower.

Trade Management: On hourly bar close below 0.8600, stops can be lowered to perhaps 0.8655, and an hourly close below 0.8575 allows the stop to be moved to perhaps 0.8625 bid and then trailed perhaps 65 pips as it progresses below 0.8550.

Risk: This is a difficult trade because of there is a lot of room for EURGBP to move around and see a throwback move higher without necessarily threatening the bearish technical outlook – so the stop level is rather arbitrary, but placed as it is to avoid too large a stop loss - one can reduce leverage and employ a wider stop if desired - otherwise, we may look for re-entry if the position is stopped out. There is plenty of headline risk that could quickly see this position stopped out – we also have the US Fed’s Bernanke testifying before Congress over the next couple of days, which can generate significant volatility. A number of UK figures are up tomorrow as well.

Chart: EURGBP daily

The climactic reversal suggests that the near term side of least resistance is lower. The first target is just ahead of recent consolidation lows.

Chart: EURGBP weekly

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