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The EURGBP pair is interesting of many levels at the moment and could be set for a major directional move on the foreign exchange market. The fundamentals surrounding the euro currency are starting to look more bearish, meaning that traders and investors may start to reprice the single currency against a broad basket of currencies.
Recent news that the Italian coalition party is collapsing, which is causing a political crisis in Italy, is certainly a bearish catalyst to watch for the euro currency. Rising short-term Italian bond yields will provide a clear signal that the market is worried.
Traditionally, the bond market tends to react before the foreign exchange market. Many market experts believe that the bond market offers a more realistic representation of market sentiment, as the foreign exchange market can be late to react and can be driven by other forces in the short-term.
Aside from the potential problems facing the Italian economy, ECB monetary policy and the German economy are going to be the other big factors determining whether the euro currency faces a protracted decline.
The ECB have noted on numerous occasions that they are closely watching the appreciation of the euro currency. ECB Governing council member Francois Villeroy de Galhaus said yesterday that the central bank needs the ability to exceed the 2% inflation without triggering monetary policy tightening.
Many market participants have taken this as a signal that the ECB will start to jawbone the euro currency lower, as the European Central Bank are running out of policy tools, especially in regard to cutting rates.
Another component is manufacturing in the eurozone. The latest PMI manufacturing releases show the engines of Europe, France and German, still posting impressive PMI numbers, well above 50. Should PMI manufacturing activity start to weaken, it could really hurt the euro. Next Friday’s PMI releases will be key.
We also have to consider the UK economy. The UK economy is far from firing on all cylinders, however, if the UK economy start to perform better than the eurozone, it could be a big market signal that the trend in the EURGBP pair is about to change.
EURGBP Short-Term Technical Analysis
The four-hour time frame shows that the EURGBP pair could bounce back towards the 0.9000 level in the short-term if bulls can continue to defend the 0.8900 support level.
A bearish triangle pattern breakout is underway while price trades below the 0.8930 level. If bulls fall to overcome the 0.8930 resistance level then a move back towards the 0.8870 level may take place.
Source by ActivTrader.
In terms of strategy, traders that are bearish towards the EURGBP pair may wait until the price reaches the 0.9000 level before initiating sell positions.
More aggressive traders may sell around current levels in expectation of coming weakness towards the 0.8870 and 0.8810 levels, respectively.
EURGBP Medium-Term Technical Analysis
Looking at the daily time chart the overall technical picture for the EURGBP pair does not look good at the moment. A large head and shoulders pattern continues to linger over pair, which is threatening to sink the EURGBP towards the 0.8500 level.
Technical analysis highlights that the bearish pattern will be activated if price falls below the 0.8870 support level. Again, watch out for heavy technical selling if the head and shoulders is activated.
Source by ActivTrader.
Traders should also be aware that a broadening wedge pattern is also seen on the daily time frame and is located between the 0.9700 to 0.8000 levels. If the EURGBP pair does take a tumble, then the long-term target could be the bottom of the wedge, at 0.8000.
