Matt Weller, CFA, CMT
Faraday Research
At the beginning of the week, we highlighted the massive market uncertainty surrounding the upcoming vote on “Brexit” (UK exit from the European Union), concluding that, “While it’s difficult to handicap the near-term price action, we’re inclined to look for more downside in GBP/USD given the ongoing uncertainty and bearish momentum. A close below 1.4080 would likely open the door for a run down to psychological support at 1.40, if not lower.” With the pair hitting a low near 1.3880 this morning, you could argue that even that bearish view was too conservative.
The impact on the EUR/GBP cross has been nearly as severe. Since forming a long-term base in the .7000-.7500 region throughout 2015, the unit has turned definitively higher thus far this year, tracking the rising uncertainty surrounding Brexit. While no one is definitively sure what a Brexit would mean for the UK and Eurozone economies (after all, it’s never happened before), traders tend to sell first and ask questions later when uncertainty is on the rise.
On a technical basis, EUR/GBP is in the middle of a potentially critical breakout. Rates are peeking out above the 50% Fibonacci retracement of the entire February 2013-July 2015 drop at .7875. Meanwhile, a steep bullish trend line connecting four separate lows (including at the end of last week) has formed and continues to provide strong support. Even the RSI is pointing higher, with the widely-watched indicator holding within a clear bullish range from 55 to 75.
Assuming today’s breakout is maintained with a close above .7875, further gains are favored in EUR/GBP. The next nearby level of resistance is psychological resistance at the .8000 handle, followed by the 61.8% Fibonacci retracement up at .8100. Only a reversal and break below the established bullish trend line (currently near .7775) would invalidate the near-term bullish bias.
For a pair that was constrained to a 500-pip range for most of last year, EUR/GBP volatility has come back with a vengeance so far in 2016.
This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.
Recommended Content
Editors’ Picks
AUD/USD dips below 0.6600 following RBA’s decision
The Australian Dollar registered losses of around 0.42% against the US Dollar on Tuesday, following the RBA's monetary policy decision to keep rates unchanged. However, it was perceived as a dovish decision. As Wednesday's Asian session began, the AUD/USD trades near 0.6591.
EUR/USD edges lower to near 1.0750 after hawkish remarks from a Fed official
EUR/USD extends its losses for the second successive session, trading around 1.0750 during the Asian session on Wednesday. The US Dollar gains ground due to the expectations of the Federal Reserve’s prolonging higher interest rates.
Gold wanes as US Dollar soars, unfazed by lower US yields
Gold price slipped during the North American session, dropping around 0.4% amid a strong US Dollar and falling US Treasury bond yields. A scarce economic docket in the United States would keep investors focused on Federal Reserve officials during the week after last Friday’s US employment report.
FTX files consensus-based plan of reorganization, awaits bankruptcy court approval
FTX has filed a consensus-based plan for its reorganization, coming almost two years after the now defunct FTX filed for Chapter 11 Bankruptcy Protection in the District of Delaware.
Living vicariously through rate cut expectations
U.S. stock indexes made gains on Tuesday as concerns about an overheating U.S. economy ease, particularly with incoming economic reports showing data surprises at their most negative levels since February of last year.