It feels as if the entire forex market has been merely setting up the chess board thus far this week in preparation for Grandmaster Mario Draghi to take his seat and play the game tomorrow. We’ve already spilled plenty of ink on the outlook for the European Central Bank meeting, including my colleague Kathleen Brooks’ thorough ECB preview report earlier today and my analysis of positioning data on Tuesday. However, with the notoriously difficult-to-trade NFP report on the horizon just 24 hours after the ECB press conference, conservative traders may want to avoid the U.S. dollar and focus on the EUR/GBP (CME:RPM14) cross instead.
Turning to the chart, the EUR/GBP has bounced from key support near .8090 over the last two weeks. In addition to being the bottom of the bearish channel, this area also represents the 127.2% Fibonacci extension of the mid-February to mid-March upswing, so the recovery is not particularly surprising. That said, the topside momentum has stalled out this week, and rates are struggling to break above the short-term 20-day moving average at .8135.
Other technical indicators are painting a similarly dour picture for the European pairing. For one, rates are putting the finishing touches on a daily Dark Cloud Cover* candlestick, indicating a shift from buying to selling pressure and marking a possible near-term top in the market. Meanwhile the MACD is turning higher, but remains well below the 0 level, showing that the medium-term momentum still remains to the downside. Similarly, the RSI indicator is still mired well in bear territory (<60), bolstering the downside bias in the pair.
Given the bearish technical outlook, traders may want to consider fading any ECB-driven bounces as long as the EURGBP stays within the 3-month bearish channel – currently the top comes in around .8165. If the pair does manage to break above this ceiling, a more sustained recovery toward the mid-8200s would be favored. Meanwhile, the next levels of support to watch are .8090 (the 127.2% Fibonacci extension), followed by .8000 (161.8% Fibonacci extension and key psychological support).
*A Dark Cloud Cover is formed when one candle opens near the top of the previous candle's range, but sellers step in and push rates down to close in the lower half of the previous candle's range. It suggests a potential trend reversal.