EUR/GBP Sets Up For A Deeper Bearish Move
Blackwell Global | May 11, 2017 12:35AM ET
Key Points:
- Price action forms an ABCD Pattern.
- Key support zone around 0.84 handle looming.
- Watch for a pullback towards the 0.83 handle in the coming days.
The EUR/GBP has been under pressure over the past week as the broader euro has continued to be buffeted by headwinds around both the Brexit and the French election. This has subsequently culminated in a continual drift lower for the pair despite some stabilisation of the French political situation. However, the technical indicators are suggesting that the decline is likely to continue in the near term…here’s why.
A cursory glance at the charts shows the dilemma that the pair currently faces with price action’s upward momentum largely having been capped by the 200 day MA. This fact, along with some volatility and a gap from the French election, has produced a relatively clear ABCD pattern that is strongly hinting at future declines in the coming days. In particular, the “D” leg is yet to complete and, subsequently, this would require a concerted decline towards the -61.80% Fibonacci level at 0.8326. Adding further weight to the bearish contention is the fact that price action is now sitting on a key zone of support, around the 0.8400 handle, and any further dips will only confirm an extension of the move towards the reversal zone (D Leg).
However, there are a few contradictory signals with the RSI Oscillator currently firmly within oversold territory. Subsequently, there may be a need for a period of moderation before a breach of support, and the continuation of the decline recommences. Regardless, all of the ingredients are in place for some significant downside moves in the coming days.
Fundamentally, there are also some risk events looming on the horizon for both the EU and UK economies. Primarily, the UK Bank of England is getting ready to meet to determine their near term interest rate regime. As a single event, this probably has the biggest propensity to cause volatility for the pair, especially if the central bank surprises with some hawkish rhetoric. From the Eurozone’s perspective, the Industrial Production figures are also relatively important and will be closely watched by the market.
Ultimately, the most realistic scenario for the pair is a short period of sideways moderation before a concerted break occurs that takes price action towards the 0.8300 handle to complete the “D” leg. However, please note that there are some key fundamental risk events looming which should be monitored for volatility.
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