The EURO GBP can be a very valuable pair to trade in your forex account. The margin required to trade it is the same as other Euro pairs and it offers $16/pip (on the standard lot size). This pair is somewhat correlated to the EUR USD but is different enough to provide plenty of advantages. When trading the EUR USD and EUR GBP together sometimes one will give a hint to the future direction of both while the other is more confusing or up in the air. This can lead to early direction of the next trend which means you make more profit both on the previous move and on the next move.
Fundamentals
The Euro Zone of course has a lot of problems. Dealing with the sovereign debt crisis makes the Euro very unattractive compared to the GBP but I believe this keeps being pushed back by more bailouts and assistance from China. Recently Italian yields surged and Irish government debt fell to junk status. This is all long term bearish especially with the risk of contagion to Spain. Spain is one of the Euro Zone’s largest economies and could bring down the European Financial Stability Fund unless the add the funds quickly. After the last EFSF increase it looks like the might be preparing for a Spanish bailout. As long as we can hold out and it is not obvious they will default on debts we can continue moving higher. Any default or restructuring of debt could create the environment we need to see a real drop in the pair. Look forward to the next Spanish debt auction for signs of positive or negative investor confidence.
The UK has had growth stagnation and rate stagnation for quite a while now and they have been trying to stay out of the news while they continue to struggle with repairing from the financial crisis. The European Central Bank has increased rates twice and even though the UK has seen higher inflation there is still no talk of a rate hike. This makes the Euro a much more attractive pair for traders and investors.
EURO GBP Elliott Wave Chart (Daily Candles)
The short term Elliott Wave patterns on the EUR GBP make it obvious the last move up was not an impulse and if you move down to an even shorter term chart, such as the 4-hour, you can see the last move down is also hard to count as impulsive. These two pieces of information make it highly probable that we will see another high. The wave labeled wave “iv” on the chart above appears to be an irregular flat that has completed. Alternately we could still move lower but it is unlikely due to Euro positioning.
Medium Term EURO GBP Elliott Wave Chart (Weekly Candles)
The medium term look at the EUR GBP shows that the entire uptrend since the middle of 2010 has been corrective. Just like on the EUR USD the first move was very obviously in 3 waves. Unlike the EUR USD it appears the final move in the EUR GBP is actually a C wave which terminates after 5 waves instead of the w-x-y move which terminates in 3 waves. The 3rd wave of the Y wave would still be a 5 wave C, however. From the weekly candles it appears this uptrend completed but we know from our look at the daily chart that the last move up was not a 5th wave. The alternate picture is that we completed the w-x-y pattern but due to the relative size the waves that would be required for this count it is unlikely.
Long Term EURO GBP Elliott Wave Chart (Monthly Candles)
The long term count here is the most interesting of all. The number one reason this chart is so interesting is because of the huge surge at the beginning of the chart followed by the relatively small correction. This huge and very quick surge most likely means we will also have a relatively quick and sharp retracement. Keeping in mind that this move is over years we can expect a very profitable bear move once this B wave completes. We also know from the medium term chart that the move up is corrective which adds to the case that this is a B wave. Wave B can go past the origin of wave A but in this case it looks close to termination and if we use the EUR USD correlation to determine the likelihood of wave B going higher than the origin of wave A the likelihood seems pretty remote.
Targets
Taking a close look at the long term chart we can see the EUR GBP was rejected at 0.9150, 0.9300, 0.9400 and 0.9500. I think the final high will probably fall in between 0.9200 and 0.9250. This means a move higher could still be highly profitable and we have currently bounced off of support and will probably continue higher. The long term target is probably around 0.7000 or even lower. If we assume wave C will be 1.618 times the length of wave A then a drop from 0.9250 takes us all the way to 0.6300 and wave equality takes us to 0.7450.