Image © European Central Bank
- GBP/EUR sets up for potential resumption higher
- Old range highs now support; buyzone set-up seen
- ECB meeting could be catalyst for new bull move
Pound Sterling is seen to be consolidating following a recent decline against the Euro with foreign exchange traders apparently adopting a wait-and-see approach to Brexit negotiations.
A lack of traction in Brexit negotiations with the EU of late has prompted the Pound-to-Euro exchange rate to pull back from recent multi-month highs at 1.1728 to trade back in the mid-1.16s, and the next major fundamental event that could drive volatility in pair is the European Central Bank (ECB) meeting on Thursday, March 7, at 12.45 GMT.
The ECB is widely expected to acknowledge the slowdown in the Eurozone economy and possibly even discuss measures they may introduce to counteract it. A new set of official forecasts will also be published. If the ECB mentions new measures or the forecasts are worse than expected, the Euro would surely weaken.
However, we are cautious in expecting too great a move. "While there is still downside potential in the Euro, we think the ECB would have to be very dovish to trigger further Euro weakness, and this it is not capable of," says Ingvild Borgen Gjerde at DNB Markets. "While this does not rule out a scenario of the Euro continuing to weaken, we see limited potential for the ECB to be the trigger behind such a move."
From a technical perspective, the Pound remains well supported against the single-currency. The GBP/EUR pair has pulled back down onto a bed of support from the former long-term range highs at 1.1600, and if this holds it is likely to provide a springboard to further potential gains.
The pull-back was in many ways natural because the pair was overbought following a blistering run higher during the course of 2019. Now that it has sold off and no longer overextended, bulls can rejoin the party and push the exchange rate higher again if the conditions are right.
A break above the 1.1723 highs would provide confirmation of a continuation up to an initial target at 1.1820.
GBP/EUR has also corrected back down into an area called the ‘buyzone’ which is the ideal place for traders to rejoin the uptrend. The buyzone is between the 10 and 20-day moving averages (MA). It is the hatched area on the chart above. The formation of a bullish green candle inside the buyzone is further confirmation the trend will resume, and this is what happened on GBP/EUR on Tuesday. Taken together with the other evidence, the buyzone set-up is a further sign the up-trend is likely to resume.
The pair may also have formed another pattern suggestive of more upside: a bull flag. This consists of a steep rally in which the ‘pole’ forms, followed by a pull-back in which the ‘flag’ forms. The usual expectation is that after the flag has completed the pair will break higher and continue its uptrend, reaching as far as the extrapolation of the pole to the upside. In the case of GBP/EUR, this recommends a target at 1.1990. This is also just above another key resistance level at 1.1977 from a monthly chart level. The 1.2000 level is another key upside target for the pair.
GBP/EUR may have lost a little ground over recent days on Brexit uncertainty but the outlook both fundamentally and technically remains affirmative.
The chances of a no-deal have diminished considerably with Parliament’s new powers to force a delay, the Euro is quite likely to lose ground if the ECB adopts a more downbeat tone on Thursday, as many expect; the charts are showing pull-backs and set-ups which strongly suggest a resumption of the uptrend is on the cards.
A near-term upside target is at 1.1820 but there is a further clustering around the magnetic upper 1.19s too.
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