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EUR/GBP - British Pound Gains But Can We Trust It?

The EUR/GBP fell during the 2/7 session, favoring pound-strength. A member of the Monetary Policy Committee (MPC), Kirstin Forbes claimed that an interest rate would be warranted because there is too much "easy" money. The MPC votes on the Bank of England's monetary policy. 

According to poundsterlinglive.com,

Forbes believes there is too much easy money in the UK economy which is performing well, and this could well overcook prices in the future.

“If these trends in both the real and nominal data are solidified, it will become increasingly difficult for me to justify tolerating such a large and likely overshoot of inflation - especially when compared to such a small and uncertain softening in growth and unemployment,” says Forbes.

It is argued by Forbes that the risks of an immediate interest rate rise are negligible given today’s extremely low interest rates at the Bank.

She believes the substantial amount of monetary stimulus that is already in place through a variety of programmes would still leave a substantial amount of monetary support for the economy.

“If the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in Bank Rate,” says Forbes.

Forbes argues that the impact of uncertainty caused by the Brexit referendum has been vastly over-exaggerated, and a major slowdown resulting from Brexit may actually never come.

There are therefore heightened risks of waiting too long before acting.

Today's statement goes against the consensus from the most recent BoE decision to hold rates as Brexit brings uncertainty. It is no surprise that the market was bullish on the British Pound after a hawkish statement from a key member of the central bank.

Let's take a look at the EUR/GBP:


(click to enlarge)

Resistance Holds Again:
- The 4H chart shows the EUR/GBP in consolidation since late January. 
- We can see that price has been held under the 0.8645 support/pivot area, while the lows have be rising.
- Today, price again failed to break above 0.8645 and came back near the consolidation support. 

Not Trusting the Pound at the Moment:
- While in the long-term, the pound could very well recover from Brexit, I think it should remain pressured in the short-term because Brexit is still a looming concern for the BoE and thus the currency market. 
- Perhaps, we should fade today's pound strength, and buy the EUR/GBP instead.
- Let's take a look at this trade idea from a reward to risk perspective.

Reward to Risk Assessment:
- Let's say we set up a trade at 0.8530 with a stop at 0.8490. This is because a break below 0.85 would likely break the consolidation support and might signal a bearish continuation.
- That is a risk of 40 pips.
- A target of 0.8640 provides a potential gain of 110 pips. 
- Already, within the context of consolidation, the long-trade at 0.8530 could be set with a reward to risk profile of almost 3:1.
- From the 4H chart, I would limit the bullish outlook to 0.87, a psychological level and also a previous support/resistance pivot. 
- After all, the market is not bullish in the 4H chart but rather sideways. 

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