EURGBP Sends a Strong Sell Signal

Key Points:

• Wedge pattern/channel constricting price actions movements.

• RSI Oscillator demonstrating some divergence as it continues to trend lower.

• Watch for a breakdown back towards the 0.9000 handle over the next few sessions.

The EURGBP has been on a relatively linear run higher of late as the pair has consolidated some of the recent fundamental and technical gains. Subsequently, the pair has climbed through the 0.9100 handle but the momentum could be about to run out given that there are presently some signs of slowing from the technical perspective.

In particular, the 4-hour timeframe provides some interesting clues as to which way the pair could move in the near term. A cursory review shows that although price has been moving concertedly to the upside, a small wedge pattern/channel has now formed which is constricting price actions movements. Subsequently, the chance of a breakout increases as the channel continues to narrow and the market is presented with its options.

In addition, the RSI Oscillator has recently exhibited a slightly bearish trend and is presently moving lower, within neutral territory, demonstrating a level of divergence which suggests that a downside move could be underway. The Stochastic Oscillator is also swinging to the downside and largely mirrors the direction which the RSI has recently taken.In fact, price action is now pushing against the lower channel constraint suggesting that there may be some pent up selling pressure.

Fundamentally, there are also many reasons to suggest a correction given the UK’s strong Retail Sales figures released overnight. The key macroeconomic indicator largely went unnoticed but it is symptomatic of the broader trend toward increased consumer demand, and by extension inflation. Subsequently, speculation is rife that the Bank of England will need to act, either though monetary policy or a balance sheet taper, over the medium term. This is something which is going to be an ongoing process but may result in significantly stronger valuations for the Pound.

Ultimately, the most likely scenario, at least in the near term, is an eventual breakdown of the bottom of the current channel. This would result in some significant downside moves with price action taking a bearish direction towards support around the key 0.9000 handle, and 0.8950 in extension. This move seems to be relatively likely over the next few session given some of the apparent selling pressures evident within the broader FX book. However, it is worth noting that there are plenty of strong sentiment swings around both the world’s current geopolitical risk factors, as well as the Brexit, which would bear watching closely.