Home on the EURGBP Range

Well, not anymore. All last week, the EUR/GBP had been stuck in a truly
textbook range. The fundamentals for the GBP have long been bearish as the
UK economy has yet to see growth, the BoE maintains ultra-accommodative
monetary policy, and now rising concerns of its sovereign debt. However, the
EUR also has fundamental problems with Greece, a member of the European
Union, suffering from sovereign debt issues. Given that the current
financial crisis is most solely imputed to debt - whether household,
corporate or sovereign debt - threats of default scare the markets silly. So
much so that the market has punished the EUR despite its fragile economic
recovery. With the bearish gridlock in the fundamentals, the EUR/GBP found
itself rangebound.

Figure 1. Hourly chart of the EUR/GBP of last week's price action

The upper limit of the range here is 0.9090 level with a secondary top at
0.9060 level. The very bottom of the range is 0.9000 level with 0.9020 level
as a secondary bottom of the range. A break above 0.9090 level to 0.9100 or
a break below 0.9000 invalidates the range and starts a breakout trend in
the direction of the break.

Now the trading strategy with rangebound instruments is to simply buy at the
bottom and take profit at the top. Then sell at the top and take profit at
the bottom. You can go on like this UNTIL price breaks the range. When this
happens, the range is invalidated. And you can expect price to continue on
in the direction of the break.


Figure 2. Daily chart of the EUR/GBP December 15, 2009

Last Friday's price action broke the range to the downside with stronger
than expected retail sales and consumer confidence out of the US increasing
risk appetite in the EUR/GBP, strengthening the GBP below 0.9000. Though
price did bounce out of there, it did not re-enter the trade as some may
have believed. Proof of this came on Monday with the lower high at 0.9047
and now the lower low at 0.8932 finally reached during today's trading
session.

Now how did I know that price would break to the downside rather than up
especially when UK fundamentals are so poor as outlined above? The clue was
given back on December 4, 2009 (see red circle). You can see on the daily
chart that the low that day breached 50% Fibonacci retracement level. It
took 2 weeks but that technical development finally played out as since then
we got the lower highs during last week's rangebound trading and today's
lower low..

Range trading employs a simple but still risky trading strategy. Aggressive
traders will play both sides of the range. More conservative traders should
play the range in the direction of the potential breakout. As always, trade
what you see, not what I think.

please see the attached files.....