EUR/USD Scalp Update- GBP/USD Setup Hinges on BoE Inflation Report

November 16, 2011
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We have reassessed our scalps from last week’s EUR/USD Scalp Report as markets continue to contemplate the threat of further European debt contagion. The euro remains well positioned within our scalp setup with little adjustment needed as the pair continues to hold above the key 1.35-figure. To compliment this scalp we’ve included the sterling setup which continues to play out through our levels with precision. Although our bias remains weighted to the downside, a look at a daily chart shows the both the euro and the pound testing key Fibonacci support with a break below risking accelerated losses for the European currencies. That said, we must acknowledge the possibility of a pullback of some magnitude with a daily break below these key levels providing further conviction for our bias.

EUR/USD Scalp Setup

EURUSD_Scalp_Update-_GBPUSD_Setup_Hinges_on_BoE_Inflation_Report_body_Picture_2.png, EUR/USD Scalp Update- GBP/USD Setup Hinges on BoE Inflation Report

The EUR/USD retraced nearly the entire decline through our setup after triggering all our scalp targets last week before encountering resistance at former trendline support around 1.3080. The subsequent sell-off has played out extremely well with crucial support now resting at the 1.35-figure. Until this level gives way, we will continue to eye topside targets for better short entries noting interim resistance targets at the 50% Fibonacci extension taken from the October 27th and November 4th crests at1.3545, 1.3580 and the 38.2% extension at 1.3620. A breach above the topside limit at 1.3660 negates our bias with such a scenario eyeing extended break-targets at 1.3715 and 1.3750.

Interim support rests at the figure with subsequent profit targets held at the 61.8% extension at 1.3470, 1.3420 and the 76.4% extension at 1.3380. A break below this level risks accelerated losses for the euro with break-targets held at 1.3320. An average hourly true range of 35.04 yields profit targets of 28-31pips depending on entry. Should ATR pull back dramatically, adjust profit targets as needed to ensure more feasible scalps.

*Note that the scalp will not be active until a break below the 1.35-handle or a rebound off 1.3545 or subsequent resistance level with RSI conviction. We will remain flexible with our bias with a move passed the topside limit at the 1.3660 eyeing topside targets.

Key Thresholds

Upcoming Events

Event risk on the pair comes in to play tomorrow morning with October CPI data on tap. However with markets remaining fixated on developments out of Italy, Greece, and Spain, the data is unlikely to fuel much volatility. The single greatest risk to our bias continues to be any major headlines coming out of the region as traders continue to eye Italian bond yields test record euro-era highs.

GBP/USD Scalp Setup

EURUSD_Scalp_Update-_GBPUSD_Setup_Hinges_on_BoE_Inflation_Report_body_11-15-20114-30-11PM.png, EUR/USD Scalp Update- GBP/USD Setup Hinges on BoE Inflation Report

The sterling dollar has continued to play through our levels with the utmost precision before finding support at the 1.58-figure in North American trade. This level represents the key 61.8% long-term Fibonacci extension taken from the July and October troughs, with a break here putting our subsequent support targets into view. Until this level gives way, we will continue to eye topside targets for better short-entries.

Interim resistance is eyed at the 100% Fibonacci extension taken from the October 31st and November 8th crests at 1.5840 with subsequent ceilings eyed at 1.5780, and the 76.4% extension at 1.5910. A breach above our topside limit at the 61.8% extension at 1.5950 negates our bias with such a scenario eyeing topside break-targets at 1.5985 abd the 1.60-figure.

Support targets are held at the 1.58-handle, backed by 1.5775, 1.5750, and 1.5720. A break below this level risks further losses for the sterling with break-limit targets eyed at the 1.57-figure and the 161.8% Fibonacci extension at 1.5665. An hourly ATR of 33.60 yields profit targets of 25-28pips depending on entry. Should ATR pull back dramatically, adjust profit targets as needed to ensure more feasible scalps.

*Note that short-scalps will not be active until a break below 1.58 or a rebound off 1.5840 or subsequent resistance level with RSI conviction. We will remain flexible with our bias with a move passed our topside limit at 1.1.5950 eyeing topside targets.

Key Thresholds

Upcoming Events

Event risk tomorrow on the pound is substantial with the Bank of England quarterly inflation report on tap. As the MPC continues to warn of possibly undershooting the 2% inflation target market expectations for an interest rate hike have continued to dwindle with Credit Suisse overnight swaps now factoring in only a 5% chance of an interest rate hike next month. In fact, twelve month expectations are calling for more than 5basis points in interest rate cuts from the central bank. Accordingly, tomorrow’s inflation report holds profound implications for the pound and if deflationary concerns see the Governor Mervin King lowering growth and inflation forecasts, the sterling could come under added pressure. On the other hand, in the unlikely event the central bank raises growth and inflation forecasts, the sterling may gather enough momentum to breach our topside limit. Given this threat, traders are advised against holding scalps through the data release.

Written by Michael Boutros, Currency Analyst with DailyFX.com

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex for updates on this scalp and other trades.

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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