FxWirePro: EUR/GBP Bears Shrug-Off Hammer And Dragonfly Doji – Trading And Hedging Setup

EURGBP minor trend has been grinding lower ever since the formations of shooting star, gravestone doji & bearish engulfing patterns at 0.8580, 0.8538 and 0.8513 levels that signalled weakness at the peaks of rallies, consequently, bears were back in action to plummet the prices below DMAs with bearish MACD crossovers. 

But for now, the prices are drifting in sideways after dragonfly doji occurrence near the strong support around 0.8485 areas. 

The price action is stuck and volatile between these levels on headlines. While prices consolidate, the underlying outlook remains constructive for the pound for further gains towards 0.8475 and 0.8250 key longer-term supports as stated in our previous post.

However, a rally back through 0.8820-0.8890 would warn that prices could be returning to the previous upper range with a potential retest of the 0.9325 highs.

While the momentum and trend oscillators indicate selling momentum and the downtrend continuation respectively.

The major trend continues to extend lower which is on the verge of 6-months lows, now trying to push through the bottom of the bear channel (refer monthly chart). 

On a broader perspectives, the pair is back in range upon the formation of shooting star at 0.9032 level (refer monthly chart). The prices are in a contracting range between 0.8250 and 0.9300-0.9415. Our analysis are biased for an eventual break lower in the short-run. A rally through 0.9415 and 0.9710 would negate that and suggest a re-test of the 2008 highs at 0.9802.

Trade tips: On trading perspective, at spot reference: 0.8448 levels, contemplating above explained technical rationale, it is advisable to trade tunnel spread option strategy using upper strikes at 0.8475 and the lower strikes at 0.8425 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, on hedging grounds we advocated initiating directional hedges that comprised of shorts in EURGBP futures contracts of February’2020 delivery and simultaneously, longs in futures of April’2020 delivery, shorts have expired now as per desired moves. We wish to maintain long positions.