Tuesday, September 9, 2014

Big move to come for the EUR/GBP?

By Matt Weller

Much like an elementary student returning to school, European currencies wish they could turn the calendar back to the halcyon days of a few months ago.

Earlier this summer, the uptrends in euro (CME:E6Z14) and sterling (CME:B6Z14) seemed unstoppable, with EUR/USD reaching as high as 1.40 and GBP/USD setting a 5-year high above 1.7100. Unfortunately for euro and sterling bulls though, the two widely-followed currencies have sold off sharply against the U.S. dollar (NYBOT:DXZ14) and other rivals over the last few months.

Aggressive easing measures by the European Central Bank have driven the euro weakness, whereas the pound has been hit by growing concerns that Scotland could declare independence next week. To determine which of these beaten-down currencies is more likely to bounce, traders can analyze the chart of the EUR/GBP cross rate.

As we go to press, the EUR/GBP is testing the top of its 3-month range at .8030. Beyond representing horizontal resistance in late June and mid-August, this level also marks the falling 100-day MA, which the pair has not closed above since all the way back in March. More broadly, the pair remains in a longer-term bearish channel, suggesting that swing traders have been more concerned with the Eurozone’s economic issues than the UK’s Scottish Independence vote.

The daily RSI confirms this view, with the indicator remaining mired in bearish territory (<60) for over a year now. That said it has formed a quadruple bullish divergence at the recent lows, showing that the selling pressure is declining and foreshadowing a possible rally in the coming days.

Source: FOREX.com

Even if Scotland votes for independence on September 18th, prudent technical traders may want to wait for a bullish breakout from the 1-year channel around .8100 and a corresponding breakout in RSI above 60 before growing outright bullish on EUR/GBP. If we do see these developments, bulls may look to target the Fibonacci retracements of this year’s drop at .8137 (50%), .8199 (61.8%), or .8287 (78.6%) next. Meanwhile, a “no” vote (still our favored outcome) could push the pair back down to its 2-year lows at .7880 as traders turn their focus backed to the Eurozone’s entrenched economic concerns. Either way, EUR/GBP should be in for a big move next week.

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