After bouncing at the start of the month, the euro has sold off across the board this week as traders increase bets that the European Central Bank will have to ease policy further in the coming months. EUR/USD, the world’s most widely-traded currency pair, has reversed back lower after managing to retrace just 23.6% of its previous drop (1.2850), but today’s report focuses on EUR/GBP.
The next 48 hours will be particularly active for EUR/GBP, with key data scheduled for release from both sides of the English Channel. During tomorrow’s European session, traders will get their first glance at economic data for the current month with the release of the Eurozone PMI readings; investors will focus in on the performance of Germany and France (the two largest Eurozone economies in particular, and if either the overall services or manufacturing reading drop below 50, the euro is likely to extend its recent drop. Meanwhile, the most recent Retail Sales and GDP figures will be released from the UK on Thursdayand Friday, and both are expected to fall from their previous readings.
Overall, the next 48 hours are likely to show continued weakness in Europe, but the rate of deterioration is what traders will be most interested in; if the UK economy can hold up better than the Eurozone’s, the pound should strength against its mainland rival.
Technical View: EUR/GBP
EUR/GBP bounced to the top of its obvious 3-month channel near 0.8050 last week before rolling over to trade back below 0.7900 as we go to press. From a longer-term perspective, the bias will remain to the downside as long as rates stay below bearish trend line resistance and the 200-day moving average in the 0.8050-0.8100 range.
More immediately, the pair just put in a Bearish Engulfing Candle* on the daily chart, showing a shift to strongly bearish momentum. Meanwhile, the MACD indicator has also turned lower and is about to cross back below both its signal line and the “0” level, which would signal a shift back to bearish momentum.
Moving forward, the EUR/GBP may find a modicum of support at the near-term Fibonacci retracements at 0.7873 (61.8%) or 0.7826 (78.6%), but in time, a retest or break of 0.7755-65 support is in play, especially if the UK economy holds up better than the Eurozone.
*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.