FxWirePro: EUR/GBP ‘Dragonfly Doji’ confronts major downtrend, bears on the verge of 2 and half years lows – Trading and hedging setup

EURGBP minor trend was grinding lower until 9th December, but a ‘Dragonfly doji’ counters at 0.8411 levels that has taken-off the rallies above 7 & 21-DMAs. Minor trend which is mildly bullish can extend further upon bullish MACD & DMA crossovers. 

While both leading oscillators indicates buying momentum. RSI and Stochastic curves show upward convergence to the current upswings that signal intensified buying momentum.

On a broader perspective, shooting star pattern popped up at 0.9032 levels, and bears resume ever since then to pull back the prices below 0.85 areas (refer monthly chart). You could observe steep price slumps for 5thstraight months in a row. As a result, the major trend now is on the verge of 2 and a half years’ lows.

The prices remain under pressure in the major trend after the break of 0.8475 support, but divergence in our intra-day studies are still giving a stronger warning of a correction phase. Resistance in this regard lies in the 0.8450-0.8490 region with a move through there suggesting a broader recovery back to 0.8560-0.8580. Above that upper resistance would be a short-term game change and suggest a broader move back towards 0.8800-0.9000 resistance.

Overall though, current price action continues to support our longer-term outlook that an eventual break lower out of the 3-year contracting range between 0.8250 and 0.9300-0.9415 levels.

Trade tips: On trading perspective, at spot reference: 0.8445 levels, contemplating above explained technical rationale, it is advisable to trade tunnel spread option strategy using upper strikes at 0.8460 levels and the lower strikes at 0.8424 levels, the strategy is likely to fetch leveraged yields as long as underlying spot FX keeps dipping towards lower strikes but remains above that level on the expiration.

Alternatively, ahead of ECB’s monetary policy and UK parliamentary elections, on hedging grounds we advocated initiating directional hedges that comprised of longs in EURGBP futures of December’19 delivery, simultaneously, shorts in futures contracts of January’2020 deliveries.