The euro headed sharply lower against the British pound last week as traders and investors bought the British currency after UK lawmakers passed the historic Brexit deal into law.
Interestingly, the initial reaction to the United Kingdom leaving the European Union has not been beneficial for the euro currency, as the single currency sold-off broadly last Friday against a broad basket of major currencies.
The big risk factor for the euro currency in 2021 is if Brexit turn out to be successful for the United Kingdom, it could prompt other countries to reassess their respective eurozone memberships.
Should we see this scenario play out, then it would be heavily bearish for the euro currency, and it could cause traders and investors to look for foreign exchange plays, such as short EURGBP.
The EURGBP pair was stuck in a fairly large trading range for much of 2020. At times the EURGBP pair looked like it could challenge towards it all-time trading high close to the 0.9800 level, especially during March of last year when the EURGBP cross rate reached 0.9500.
In terms of where the EURGBP is trading now, the 0.8800 to 0.9200 trading range has been a mainstay for the pair, with bulls and bears locked in a battle for short-term control.
Now that Brexit has happened, it could be a good time to look at this pair with a long-term view, especially if the mentioned trading range is broken with conviction in 2021.
EURGBP Short-Term Technical Analysis
The four-hour time frame shows that a large head and shoulders pattern appears to forming, following multiple upside rejections from the 0.9200 level over recent months.
A breakout under the 0.8875 level is currently required to activate the bearish price pattern on the mentioned time frame. According to the overall size of the pattern, a decline of some 500 points could take place if bears can activate the bearish pattern.
Source by ActivTrader.
As mentioned earlier, the pair has been range-bound for multiple months so traders must be extremely careful selling the pair from close to the bottom of the range.
A clear fundamental catalyst is probably needed to send the EURGBP pair into a new trading range. With that said, the events surrounding Brexit in 2021 could provide the needed catalyst.
EURGBP Medium-Term Technical Analysis
Looking at the daily time chart, an extremely large broadening wedge pattern between the 0.9550 and 0.8000 levels is clearly visible.
Broadening wedge patterns typically indicate large trading ranges before a major breakout from the broadening wedge pattern starts to take place.
Source by ActivTrader.
Failure to break above the 0.9550 level this year could see the EURGBP pair pushed down towards the bottom of the broadening wedge pattern.
The EURGBP pair’s 200-day moving average is currently located around the 0.8970 level. The pair has been able to hold above this key technical metric since April 2020.
A loss of the 200-day moving average could mark a technical seachange for the EURGBP pair, placing the 0.8000 level as a valid bearish target.