EURGBP: 2012 low in sight?

The pound fell back this morning after the Bank of England’s last policy meeting minutes revealed the MPC was a lot less hawkish than some had anticipated. For example, there were warnings that the outlook for the housing market is slightly less strong, that the MPC sees “tentative signs of modest output slowdown” in the second half of the year, and that the weakness of wages despite strong rises in employment was “becoming more striking.” Nevertheless, the losses were limited as the bears held fire ahead of the key retail sales and GDP data on Thursday and Friday, respectively. As we pointed out yesterday, the GBP still remains in a technical upward trend against the USD, although there is a danger that further losses could be seen in the short-term. The GBP crosses have likewise weakened recently and today the EUR/GBP has managed to bounce back slightly. Nevertheless, the EUR/GBP still remains on course to potentially return to its July 2012 low point of 0.7755/6, although probably not before a small corrective move in the very short-term.

The last time I looked at the EUR/GBP was at the start of May. As a reminder, I pointed out that the eurozone economy was facing significant headwinds and that the ECB was “clearly not comfortable about the recent appreciation of the euro” which at the time was trading near the 1.40 mark against the USD. On top of this, the UK economy was continuing to improve which brought rate hike expectations forward. Sure enough, the ECB intervened in June as it announced many stimulatory measures and this caused the euro to tumble. The pound meanwhile continued to appreciate against most major currencies, including the euro. As a result, the EURGBP descended towards our bearish targets of 0.8090/0.8100 then 0.8000/10, before falling further. Even before the ECB announcement, the EUR/GBP had already broken below the key 0.8200 support level; to understand why this was such a bearish development, just take a look at the chart in the email from May at the end of this page.

Those two targets (0.8090/0.8100 and 0.8000/10) were based on a combination of psychological thresholds and Fibonacci, specifically the extension levels of the last notable rally that took place between February and March this year. As can be seen from the updated chart in figure 1, the EUR/GBP has now fallen beyond the 200% level of that price swing and is heading towards the 261.8% mark at 0.7765. Interestingly, this level comes in just 10 pips ahead of the July 2012 low point at 0.7755/6. Thus the 0.7755/65 area is now our extended bearish target.

In the near-term however the EUR/GBP may bounce back slightly. At the current levels, price is testing the support trend of the bearish channel it has been stuck inside for more than a year now. What’s more, the RSI has created multiple divergences recently whereby it has created higher lows while the EUR/GBP has made repeated lower lows. This divergence suggests that the momentum may be fading somewhat. However the bulls would do really well if they were to push price near the upper resistance trend of the bearish channel, let alone break above it. There’s short term resistance seen at 0.7915/30 area followed by 0.7980. These levels were previously support and resistance. But if the selling pressure gathers renewed momentum and the currency pair breaks below the lower support trend then we may see an accelerated move towards, and possibly beyond, that July 2012 low.