See our fundamental outlook on the Euro and Sterling in the Quarterly Forecasts.
EURGBP is trading at a pretty significant area of resistance by way of the October 7 spike-high (GBPUSD ‘flash crash’) and its subsequent retest. Not only are current levels important, but there is a technical pattern (rising wedge) which has been in development for over a month now. Given the rising wedge is arriving at resistance and the often-times bearish nature of these patterns, a break to the downside could be swift. Buyers who have been buying with little consequence (retracements) are caught off guard which can lead to a rush for the exit once those winning positions turn into losing ones.
We have to keep in mind, though, these can also lead to squeezes higher outside of the pattern, so it is important to wait for a confirmed break of the lower trend-line before getting fully involved. With that said, a break higher above the top of the pattern and the 10/11 retest-day will quickly bring into focus the spike high from 10/7. This is where the potential for a fake-out breakout arises; an initial squeeze (sucking in fresh buyers) leads to a stall and quick reversal back through the other side of the rising wedge. These can turn out to be even more powerful events as an even larger crowd of longs liquidate.
Bottom line, in either event the lower trend-line needs to break first. Looking for targets on a trigger we first turn to the trend-line rising up from May, then the significant band of support extending back to November surrounding 8850.
Daily
Trade Criteria:
Entry: Daily close below bottom-side trend-line
Stop: Tight stops could be placed above the confirmation bar, more conservative stops to avoid whipsaw would be placed above the highest point of the pattern.
Targets: May trend-line, 8850
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---Written by Paul Robinson, Market Analyst
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