The dollar is stabilizing after the sharp decline in July as the DXY index hits a major support trendline, while EURUSD is at a 12-year resistance. The focus today is on the NFP/jobs reports from the US, which could give the much-needed boost to the USD to finally rebound. 

While risk-reward favors a USD rebound (i.e., lower EURUSD), it’s questionable how large this rebound will be when we consider the strong momentum of the bearish USD trend thus far. Hence, picking a currency to short against the dollar isn’t easy in this environment, particularly because a pronounced weakness in that currency will likely be needed to push it notably lower vs. USD. The strong bullish momentum behind the euro suggests a sideways consolidation is more likely in EURUSD at this stage than a material correction lower.

With that said, we are turning our attention on the crosses, and point out a potential opportunity in the EURGBP pair.

The technicals are clearly aligned here, which is always helpful when making a trade. EURGBP tested the trendline and the 55-day moving average and successfully rebounded, now trading above the moving average also (see chart below).

The technicals favor upside price action from here, albeit gradual similar to the recent EURGBP trends. The risk-reward is also attractive, with around 60 pips for the stop loss and around 120 - 200 pips of potential targets to the upside. If EURGBP will continue to follow it’s recent “gradual pattern” of creating up and down swings, then this would be the “perfect” place for the next up swing to occur.

In the last few days of July, GBPUSD rallied stronger than EURUSD, dragging down EURGBP. GBPUSD is trading near 1.32, an area deemed expensive for a currency that is facing multiple problems and uncertainties. Considering that, this rally in sterling is unlikely to be sustainable. 

Above all, the next serious round of UK-EU trade negotiations is expected to get going in September, which would be the primary factor to impact the pound. Still, some hawkish language before then, perhaps from Boris Johnson himself, will easily hurt sterling at these elevated levels. The upside potential for GBP, on the other hand, should be limited.

Note: We will be off for a two-week holiday from Monday. I will continue sending the weekly analysis and trade idea newsletters again from the week starting on August 24. Take care and stay safe!

• July 10 - Long EURAUD from 1.6295 (in progress around +100 pips)
• August 1 - Long EURCHF setup (trade not triggered yet)