On Monday, we highlighted the fundamental and technical reasons we believed that the EUR/GBP would recommence its recent downtrend this week. As anticipated, the pair has dropped consistently thus far this week, hitting a new 22-month low after a generally dovish press conference from ECB President Draghi this morning.
While bears may look to book profits ahead of the weekend, the pair’s break below long-term 78.6% Fibonacci retracement support at .7980 suggests the pair’s downtrend could easily extend as we move through the rest of the summer.
To briefly update the bearish technical factors in play, the pair is still trapped within a bearish channel off the mid-March highs. Similarly, the RSI continues to trend lower within its own bearish channel. In this case, the indicator will inevitably break out above its bearish channel soon, but that may not necessarily suggest an imminent end to the bearish channel in the EUR/GBP (CME:RPU14) itself; instead it is simply due to the bounded (0-100 range) formula for calculating RSI. As we noted on Monday, the MACD has rolled back over and is once again showing accelerating bearish momentum in pair.
In the short-term, rates may have room to drop toward .7900 before bouncing. Looking further, the July 2012 low at .7755 could eventually come into play later this summer. Bears would want to tap the brakes on their enthusiasm if the pair moves back above key previous-support-turned-resistance at .7980, and the overall bias would shift back to the topside if rates are able to break the series of lower lows and lower highs by eclipsing last week’s top at .8035.