Last Wednesday, we discussed the potential for a EUR/GBP to form a meaningful bottom if rates could break above the key .7980 area.
Though rates inched above that level to close last week, this week’s price action has been extremely disappointing for the bulls, with rates pulling back to the mid-.7900s in lackluster trade. However, as my colleague Kathleen Brooks noted earlier today, the imminent release of UK employment data, and more importantly, the Bank of England’s Quarterly Inflation Report (QIR), should inject some much needed volatility into the pair.
On a technical basis, the most compelling formation is the 5-week inverted Head-and-Shoulders pattern. For the uninitiated, the classic price action pattern shows a shift from a downtrend (lower lows and lower highs) to an uptrend (higher highs and higher lows) and is typically seen at major bottoms in the chart.
In this case though, it’s critical to note that the pattern is not confirmed unless rates are able to break above the “neckline” in the .7980-90 zone. Thus far, we haven’t seen a conclusive break of the neckline, but if we do, the pattern would project a potential move up to the measured move target around .8100. Beyond the H&S pattern, both the RSI and MACD have been trending higher since mid-June and are approaching trend-defining levels (60 in RSI and 0 in the MACD).
Given the growing evidence of a potential bottom in EUR/GBP, a weak employment report or downbeat QIR tomorrow could provide the catalyst for a major breakout above .7980-90. If we do see a bullish breakout, traders will likely start to turn their eyes upward toward .8075 (38.2% Fib retracement) or .8100 (inverted H&S measured move target) next. On the other hand, a strong employment report or more hawkish QIR may keep EURGBP mired in its recent .7880-.7980 range for the remainder of the week at least.