Last week, we highlighted the key levels to watch on EURGBP ahead of the highly anticipated Scottish Independence referendum. As we all know by now, the Scots decided to stay in the UK in exchange for greater freedoms and more autonomy (the so-called “Devo Max” that my colleague Kathleen Brooks covered in depth on Friday). While the political balance of power in the UK is far from settled, traders have pushed the pound higher now that the biggest uncertainty has been removed.
Turning our attention to EURGBP specifically, the pair dropped to a new two-year low in the wake of the vote, breaking below key previous support at .7890. Not surprisingly that previous floor became a new ceiling on price earlier in today’s session, presenting a classic example of the polarity principle of support and resistance. From a price action perspective, the pair is currently showing a Bearish Pin Candle* (inverted hammer) on the daily chart, indicating an intraday shift from buying to selling pressure and foreshadowing more weakness in the coming days.
The secondary indicators bolster the bearish case. The MACD is trending lower below both its signal line and the “0” level, showing growing bearish momentum. Meanwhile, the RSI indicator has been in bearish territory (< 60) for the majority of the year, and rates still could fall further before becoming oversold (< 30).
Moving forward, the bias in EURGBP will be lower as long as previous-support-turned-resistance at .7890 caps rates. To the downside, bears may start to turn their eyes toward the 6-year low and bottom of the 1-year bearish channel at .7755. Even if rates manage to climb back above the .7890 level, the convergence of the 50- and 100-day moving averages in the .7950-.8000 zone may cap rates.
*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken.
Source: FOREX.com
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