EUR/GBP: Downtrend Resuming After Today’s Turbulence?

 | Nov 26, 2014 11:01AM ET

While many US traders are anxiously watching the status of their flights on the biggest travel day of the year, European traders have seen a bit of turbulence in today’s European session. First, traders got a glimpse of the revision to Q3 UK GDP, which came out at 0.7% q/q as expected, marking the 6th consecutive quarter this specific reading has been 0.7% or 0.8%. While some of the report’s details were less-than-stellar, traders have taken this reading as a green light to push the pound higher, and the widely-watched GBP/USD has now broken above the top of its 2-week range at 1.5735 to trade up to a high of 1.5770 so far.

The news on the other side of the English Channel was more ambiguous. Sending the strongest signal yet, ECB Vice President Vitor Constancio explicitly stated that the central bank is prepared to start buying sovereign bonds in Q1 of next year if inflation fails to rise meaningfully. This is the first time that a high-ranking ECB official has highlighted a specific time period for enacting a full-blown QE program, and European sovereign bond yields have reached all-time record lows as a result, though the reaction in the forex market has been more limited.

Technical View: EUR/GBP

The clearest way to see how these two economic developments are interacting is through EUR/GBP. After turning lower horizontal resistance and the top of its bearish channel near .8000 last week (see my colleague Fawad Razaqzada’s EUR/GBP note from last week for more), rates stabilized off the .7900 level early this week. However, today’s data has pushed the pair back lower, undoing the bounce from the first two days of the week and forming a (unfinished) Bearish Engulfing Candle*. For the uninitiated, this candlestick pattern shows a shift from buying to selling pressure and raises the probability of a continuation lower later this week. At the same time, the pair’s MACD is rolling over and on the verge of crossing below its signal line, suggesting that bearish momentum may soon return.

Assuming EUR/GBP finishes today below .7917, the bias will remain lower in EUR/GBP. From here, bears may start to target the Fibonacci retracements of November’s bounce, including .7890 (61.8%, .7850 (78.6%) and .7800 (previous support). Meanwhile, even if rates do recover today, the medium-term bias will remain to the downside as long as the pair stays within its bearish channel (below ~.8000).