EUR/GBP Continued Strength

Sorry all for the delayed upload. There were technical issues yesterday so that we could not post here in a timely manner. Original posting was from yesterday as seen at www.backbayfx.com/blog.php

24 September, 2009 by Stephen Leahy

Boston September 24, 08:56 EST

EUR/GBP (current bid .9131) keeps moving relentlessly higher. It is one of our favorite trade ideas because it captures two themes for us.

1) EUR/USD will move higher on the back of a weak USD.

2) The currency of the UK (GBP) still has a way to fall.

As we noted on ForexTV and our blog postings last week, we are already long EUR/USD and want to go short GBP but not against the USD. So we combined our two theories, took a look at the technical analysis and decided that a long EUR/GBP position would give us the trade exposure we wanted.

Today's move in the pair (almost a 100 pip gain as of this writing) has a lot to do with the release of the Bank of England's most recent meeting. The BoE already has one of the most aggressive quantitative easing programs going (aka: they are printing Uk Pounds faster than the US Fed is printing USD). Yesterday's relaese shows they are not only keeping their quant easing in place, but are willing to discuss increasing the amount!

EUR/GBP had a move of historical signifigance at ehe end of 2008 when the pair dipped slightly from approx .7900 to .7700 in early October 2008 and then within two months shot up to .9800. That is an almost 25% move in two months! Almost unheard of in G-8 country currencies!

What that means to us now is two things:

1) a move of that signifigance is not out of the question.

2) a move of only 17% from the recent lows in EUR/GBP of .8500 would take us up to parity.

It is a cruel world for central bankers who get things wrong. Markets really do like to assert their power over mortal men and women.

We think there will be a continuation of this move higher in EUR/GBP until at least the next resistance level of .9435. As for the "impossible" notion of the pair hitting parity? We can't wait to hear the Bank of England's comments as we get near that mark.

Stay Nimble!

Stephen Leahy

Back Bay FX Services, LLC

www.backbayfx.com