EUR/GBP – Correlation would suggest a leg higher soon

Ian Coleman FXStreet

Breaking down the timeframes

Background: The UK economy has not collapsed, the borders are still open and there is food on the shelves! Hey ho Brexit! This has resulted in EURGBP drifting lower. I believe this is more on Euro weakness than GBP strengthI want to look at EURGBP this morning with a focus on correlation using the GBPUSD and EURUSD charts.

EUR/GBP Monthly

I wanted to look at this frightening looking chart to start with. If this formation plays out, then a Crab formation is seen all the way down at 0.3336-0.3143. This would have to suggest a complete meltdown in the Euro system. The fact it has reacted so well from the 88.6% level at 0.9485 gives the formation a bit more strength and fills me with dread!

Let us keep our fingers crossed that this does not happen and look at the shorter timeframe setup.

EUR/GBP four-hours

We have a 261.8% extension level located at 0.8844. From an Elliott Wave perspective this could be the completion of a 5-wave bearish count suggesting that the next corrective wave (higher) should start soon.

Correlation – Here we need to see a bias to BUY EURO against SELLING GBP.

GBP/USD four-hours

Broken out of the flag formation to the upside. The measured move target for this pattern is seen at 1.3732. That is 80 pips from current price and more importantly, 0.58%.

EUR/USD four-hours

Broke out of the wedge formation to the downside. The pair achieved its measured move target of 1.2130. From an Elliott Wave perspective this could be the completion of a 5-wave bearish count suggesting that the next corrective wave (higher) should start soon. This should only be a short-term correction (giving the USD bias) but we could rally to the right shoulder at 1.2245. That is 0.99% from current price.

Correlation conclusion: So, using correlation, a correction on GBPUSD should be shorter (0.58%) than a correction higher in EURUSD (0.99%) giving EURGBP an upside bias.

I am watching the 261.8% extension closely. You may ask ‘why not buy EURUSD?’. The reason being that the long-term bias is still bearish and I prefer to ‘trade with the trend’.

Author

Ian Coleman

FXStreet

Ian started his financial career at the age of 18 working as a Junior Swiss Broker at Godsell Astley and Pearce (London). He quickly moved through the ranks and was Desk Manager at RP Martins at the age of 29.

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