Trade of the Week | August 6-10, 2012

The exchange rate between Europe's single currency and the American currency has traditionally garnered the lion's share of attention from forex traders and media alike. The euro and the US dollar represent the two most traded currencies in the foreign exchange market. The Trade of the Week (TOTW) focuses on the recent change in the euro's value against the fourth most traded currency in the FX market.

The chart below shows approximately thirteen months of price history on the EUR/GBP currency pair. Weekly candlesticks moving from the upper left corner to the lower right corner of the chart portray the pair's general downtrend.

The euro had staged a broad recovery over the past couple of weeks against multiple major currencies. After starting the week on another positive note during Monday's Asian and London trading sessions, the euro was parked a smidge above £0.7950 at the beginning of the 6 August New York session. Five notable sources of prospective for the euro pound were situated less than fifteen pips north of the 0.7950 level on that day: its low established in May, the 50 percent Fibonacci retracement level of the pair's drop from its June high [labeled (1) on the chart below] to July low [labeled (2) on the chart below], the daily 55 ema, and two resistance pivot points [daily M4 and weekly R1].

Traders seeking a EUR/GBP short trade entry were presented with multiple opportunities during Monday's New York morning session, and Tuesday's Asian and London sessions. Short positions received a more comfortable cushion on Wednesday as comments made by Bank of England governor Sir Mervyn King gave pound sterling a boost. Speculators seeking a profit target for their short position, found one when the pair reached its daily S2 pivot point during Friday's New York morning session.