Image © Adobe Images
- GBP/EUR still in a downtrend despite a bounce
- Worrying wedge pattern could be warning of reversal
- Downtrend looks 'long in the tooth' on weekly chart
The British Pound is consolidating against the Euro after slightly better-than-expected growth figures for May released mid-week indicated the UK economy might not be in as bad shape as some analysts had feared.
Sterling caught a slight bid on the data, putting a floor under the sharp declines seen on Tuesday which saw GBP/EUR break below the key 1.1122 level.
The pair is currently trading at around 1.1116, up a marginal 0.10% on the day.
This small rebound, however, needs to be put into the context of a wider downtrend, and it came after the pair broke to 6-monthly lows of 1.1100.
The pair’s charts are showing that this downtrend is still intact, and since it is generally held as true that the ‘trend is your friend’, and, therefore, more likely to extend than not, the bias remains to the downside.
The next target lower is at 1.1050, but we would first want to see a break below the 1.1100 lows for confirmation.
This is partly because the pair is forming a consolidation pattern, possibly even a bullish wedge pattern. It is too soon to know for sure but if it is a wedge it could be indicating a reversal is on the horizon.
Meanwhile, we remain bears out of respect for the longer-term downtrend, and because the triangular shape could also be a bearish continuation pattern.
The 4-hr chart is used to assess the short-term trend, which includes the next 5 days.
The daily chart is showing a similar picture. The pair is in a steady downtrend which has tapered off a little bit over the last few days and formed what looks like a wedge or triangle type pattern.
Again it is too soon to say whether this is a sign of a reversal or not - it may simply be a continuation pattern, but there is a risk it could breakout higher.
The RSI momentum indicator in the lower panel is converging bullishly with price, however, which adds evidence to the reversal hypothesis.
‘Convergence’ happens when price makes a new low but RSI does not. The non-confirmation sets up a convergence which is a bullish sign for price. This heightens the risk the pair could be preparing to reverse higher.
A break above the 8th of July 1.1167 highs would probably confirm a breakout from the pattern and give a green-light to a move higher to a target at 1.1270.
Our base-case, however, remains for a continuation of the entrenched downtrend to the long-term range lows at around 1.1000 subject to confirmation from a break below 1.1100.
We use the daily chart to analyse the outlook in the medium-term which is defined as the next week to month.
The weekly chart shows the pair entering its 10th week of declines.
Whilst the established downtrend is expected to continue, the trend is looking a little long-in-the-tooth as well, after 10 consecutive down weeks without a break.
There is a growing risk of a rebound, if only temporarily, as the market readjusts and finds a new equilibrium level, or as traders with bearish-bets take profit ahead of the approaching key range low.
The RSI momentum indicator (circled) is also looking increasingly like it may be rounding out a bottom, with the possibility of a gentle climb occurring over the forecast horizon, mirror a similar recovery in price.
In any case, a move down to 1.1000 would probably lead to a bounce back up within the established range, back up towards the 1.1600 highs.
Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.