Friday Showdown: EUR/GBP

• faithmight
• July 1st, 2010

Happy 3rd Quarter! And what an opening to the new quarter it was where the $USDX, $SPY, $DJIA, and $GLD defied correlations and all weakened significantly in today’s session. The biggest reason amongst traders is the ever looming confirmation that the US economy is weakening again and slipping into a double-dip recession. Economic data from the United States has been soft for the last 2 weeks and the market today has punished USD-denominated assets as a result. Tomorrow’s non-farm payrolls report will be the golden confirmation that the market will need to decide the fate of the US economy. Consequently, expect a whole LOT of volatility in the $USDX.

In an effort to stay safe but satisfy my desire to trade I am looking to the $EURGB currency pair to trade tomorrow’s NFP Friday. I want to stay away from USD-related pairs until the market has a clear idea of what it wants to do with the USD.

The biggest thing to note about the $EURGBP is that despite today’s 300-pip rally in the $EURUSD, the $EURGBP has managed to respect the 61.8% Fibonacci retracement level on the daily chart. If this level continues to hold, expect a resumption of the LT bearish trend and for the pair to eventually make new lows towards the 0.8000 level. A fall in the $EURGBP will also support the monster rally occurring in the $GBPUSD. If this week’s price action is a clue, I expect the $USDX to continue to weaken and both the $EUR and $GBP to rally as a result. Because the fundamental backdrop is more positive for sterling than euro, a $GBPUSD rally may outstrip a $EURUSD rally resulting in a drop in the $EURGBP. Take care on Friday and trade what you see, not what I think.

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Tickers: $DJIA, $EURUSD, $GLD, $SPY, $USDX, EURGBP, GBPUSD

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