The EUR/GBP is historically known for its small trading ranges and its tendency to be a range bound currency pair. Recently this has not been the case with the Euro gaining ground on many key currencies including the British Pound . The ECB (European Central Bank) recently raised its key interest rate to 1.25% on April 7th adding to the projected strength of its currency. This rate increase differs significantly from the BOE (Bank of England) who have held rates steady at a paltry 0.50 %. As money follows yield this may bode well for more Euro strength if rate hikes continue.

Money follows yield, but there are many other economic conditions to consider. There has been new looming speculation of the European debt crisis continuing. Greece in particular is providing a roadblock for the EU's economic recovery. Currently, Greece's debt is an estimated at 140% of GDP and is considered unsustainable by many. As fear of default resumes, traders may pull their money out of Euros and look for a safer investment environment.

Price Action

When we have a conflicting fundamental outlook, charting can sometimes bring us some clues regarding price direction. Looking at the daily chart above, we can see the rally of the EUR/GBP from the low of .8062 established on June 2010. Prices have created higher lows however a new higher high has yet to be established.

Taking price in to a 4hr chart, we can see resistance held at the high just above our .8900 handle. This is confirmed by a lower low being formed and a new move beginning towards short term support. Sellers can look to a break below support for a chance at a run at longer term support found on our daily. New highs would indicate an uptrend is in play and buy trades can be initiated at this point.

Trading O pportunity

My preference is to place entry orders on the EUR/GBP waiting for a breakout. If resistance holds we can look to place an entry order under the previous low near .8760. Support will become resistance and stops can be placed over new resistance. A 1:2 risk reward would have us looking for a move to .8660 or better.

Alternative scenarios include price breaking out to new highs. Buy orders can be placed over our high above .8900 in anticipation of an upward trend developing.

Walker England contributes to the Instructor Trading Tips articles. To receive more timely notifications on his reports, email [email protected] to be added to the distribution list.