Euro/pound: Downtrend set to resume as sterling sparkles

After threatening for the past few weeks, the GBP/USD finally broke out to a conclusive 6-year high above the 1.70 level this morning and, with rates currently trading around 1.7100, the breakout appears likely to hold for now.

Meanwhile, the EUR/USD is also rallying on today’s broad-based USD (NYBOT:DX) weakness, though the single currency appears to be struggling to clear resistance at its 200-day MA in the upper-1.3600s. We’ll be keeping a close eye on both these currency pairs as we move through the week, but given the action-packed U.S. economic calendar this week, traders may want to strip out any impact from the greenback and focus on the EUR/GBP (CME:RPU14) cross.

Unlike the EUR/USD, the EUR/GBP’s bounce over the past few weeks has been relatively subdued, with rates up only 50 pips from the 1.5-year low set two weeks ago. Furthermore, the pair has been putting in lower highs and lower lows since March and remains trapped within a 6-month bearish channel.
 



Source: FOREX.com
 

Looking to the RSI indicator, it remains within its corresponding bearish channel. The recent consolidation in price is seen as a bearish development as the pair corrected its oversold condition through time rather than through price. The MACD has ticked above its signal line, but remains well below the 0 level, confirming that the overall momentum remains to the downside in the pair.

On the fundamental side of the ledger, we’ll see an influx of PMI reports out of both the UK and Europe in the next three days, as well as European Central Bank meeting (see my colleague Kathleen Brooks ECB preview from earlier today for more). In brief, we can’t see how the ECB will be anything but extremely dovish given the euro’s recent recovery and the uniformly weak economic data out of the currency zone.

If the UK data remains strong or European data disappoints, a break below longer-term 78.6% Fibonacci support near .7980 is possible later this week. On the other hand, only a confirmed break above the channel top at .8050 would shift the bias back to the topside from here.

About the Author
Matt Weller

Senior Technical Analyst for FOREX.com. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Matt is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).

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