The euro is lower and Italian bond yields are up over 45 basis points from last week's levels as Italy's new, populist leaders challenge European Union policy on debt and migration.
Trade view / 08 January 2013 at 13:35 GMT

Selling EURGBP after 1-week highs failed

Head of FX Strategy / Saxo Bank
Price target:
Market price:

UPDATE: Jan. 9 - the trade went into small profit and then EURGBP rallied sharply today from 0.8132 to 0.8161. I prefer taking off for small loss ahead of ECB at top of entry range (currently trading 0.8150) rather than waiting around for the stop at this point...GBP looking very weak elsewhere.

Trade: Selling EURGBP around 0.8140-50

Stop: 0.8171 bid

Targets: 0.8085 and 0.8055

  • The Euro may be on the defensive this quarter after outperformance in Q4 of last year as its underweighting in central bank reserves portfolios has been sharply reduced going into year end. Also, we have the uncertainty of the upcoming Italian elections later this quarter and ongoing social tension at the EU periphery in general could see renewed worries about the future of the EMU.
  • With Italy and Spain having particularly heavy debt issuance needs this quarter (debt auctions up on Thursday for Spain and Friday for Italy), we may need new signals of further ECB easing if we're to see peripheral sovereigns able to continue to fund themselves. Any weakness at these auctions could see an eventual ECB response.
  • Sterling may be in a bit of a quiet period in terms of monetary policy as the BoE leadership is set to change in June. This could prove GBP supportive if the impression is that no further QE will be forthcoming for now.
  • There is widespread complacency and GBP tends to outperform slightly in the event we see consolidation/risk aversion in the days ahead.
  • Technically, the pair attempted a new one-week high today around the 50% retracement area of the previous sell-off (0.8155 area). The inability of the pair to hold these levels suggests higher risk that sellers may come in again in a follow up move of the large sell-off from the previous 0.8200+ highs..

Trade management: If the pair trades below 0.8125, the stop may be lowered 15 ticks, if the pair trades below 0.8100, the stop may be lowered to break even or slightly better. Half of profits may be taken at the first target and the other half at the second target if the trade progresses.

Risk: Besides the normal volatility risk that could see the position stopped out, the ECB is scheduled to meet on Thursday, which could see the Euro breaking either way, depending on the ECB's decision on rates and what Draghi may have to say at the press conference.

Daily Chart:


Weekly Chart:



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