Buy EUR Vs GBP & JPY And Beware A Bond Sell-Off

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EUR/GBP longs* are something we’ve pushed for a while and we will stick with them. The possibility of talk of ECB tapering persisting makes for an attractive risk profile above and beyond the headlines that tumble out of the UK government.

We expect the downtrend in GBP/USD to slow at some stage after such a sharp move, but we’re still firmly bearish on Sterling.

EUR/JPY is likely to move somewhat slower than USD/JPY, which we also like, but it may have more long-term upside. The dollar’s upside is going to be constrained at some point by Fed concerns about its trade-weighted strength. (Note, nearly 50% of the USD TWI is made up of CNY, CAD and MXN, all of which have weakened and could weaken further if Donald Trump’s opinion poll ratings rise further). By contrast, the Euro is not at stretched levels.

Technicals:

Stabilisation signs are emerging in EUR/JPY after it tested 112, as well as the 61.8% retracement of the 2012-2014 up move. On the daily chart, the pair briefly tested the 2-year descending channel support (109.50) and since then a recovery has been in force. Daily RSI has been diverging positively suggesting the possibility of persisting with the pullback.

The pair should head higher towards a descending trend drawn since February at 116.40/90 which also corresponds with the 76.4% retracement from July and even towards the aforementioned channel upper limit at 121.50/122.50 with the interim target at the July highs of 118.50.

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