The EUR/GBP pair fell during the session on Thursday, but as you can see got enough of a boost at the 0.85 handle in order to bounce and form a hammer. After a significant move lower, this makes sense that we would find some type of support down here because there is so much noise in this general vicinity. That being said, I am not a big fan of this pair in general as it does tend to be very choppy. However, it makes sense to buy down here simply because the Euro looks like it's ready to breakout in general. Going forward, I expect the Euro to do better than the Pound, simply because the Europeans have just exited a recession.
Looking at this chart, I can see quite a bit of support all the way down to the 0.8450 level, so a stop loss would be relatively tight considering the possible gains. We could go size 0.88 in the short term, and as a result I think the risk to reward ratio favors a long position. However, I want to see the top of the candle from Thursday broken in order to consider it, and quite frankly the 0.86 level could be taken out as well if you are a bit more conservative with your risk tolerance.
Choppiness
Remember the choppiness is the norm in this pair, simply because the two economies are so intertwined. We see this in the USD/CAD pair as well, as it is a very similar set of circumstances. However, the Europeans have been pretty beat up over the last couple of years, so it makes sense to me that they will eventually get a little bit of a reprieve. I think ultimately we will go to the 0.88 handle, but it might take a couple of weeks to get there because we are in the dead of summer, a time that is not typically known for massive moves. A lot of the big money traders are on vacation, so expect this to be more of a long-term trade than a short-term trade.