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GBP/EUR Surge Could Be a Technical Game-changer

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- GBP/EUR rises by more than one big figure in a day

- Breaks back above key levels and bests September high

- The pair may now go higher as bullish pattern tips gains.

The Pound-to-Euro rate was advancing Friday off the back of renewed hopes that a Brexit deal will soon be reached and studies of the charts suggest further gains could now be in the pipeline. 

Sterling extended gains Friday after negotiators said they'd had a productive meeting, and had already risen more than 180 pips on Thursday to trade above 1.13 after Irish Prime Minister Leo Varadkar said he saw a “pathway” to a possible Brexit deal, following talks with Boris Johnson.  

Varadkar's comments reflect a turnaround in Ireland’s stance and suggest at least some possibility a deal can be done in time for the October 19 and October 31 deadlines. And from a technical analysis standpoint, the sudden strong rise in Sterling that accompanied the comments is a potential game-changer for the Pound-to-Euro pair, which had been in decline since September 20.

The Pound had slipped lower as hopes of a deal faded earlier this week and a major technical development occurred Monday when it broke below an important trendline. This is often an extremely negative signal for traders, suggesting bears have got the upper hand and the possibility of deeper declines. However, the fall was arrested by the 50-day moving average (MA) on Wednesday and Sterling burst higher Thursday, before extending gains Friday. 

Above: Pound-to-Euro rate shown at daily intervals.

Sterling has completely recouped earlier loses in the space of only 24 hours and has broken above the key 200-day moving-average this Friday as well as the September 20 highs. The big question now is where to from here? 

Analysts at Commerzbank say the pair will probably fail to break significantly above the September 20 highs in the 1.1380s (or 0.88 for EUR/GBP, which is the pair from a Euro perspective), and this will provide a hard ceiling from which it will fall back over the next few weeks. However, there is another view that says the pair may continue higher, based on the possibility Sterling is in the process of forming what is called a ‘measured move’ or ‘ABCD’ price pattern. 

Measured moves are three wave zig-zags which look like the sort of comic book lightning bolts that an angry Norse god might hurl. The important thing about them is that the early part of the patterns provide an excellent basis for forecasting the end. This is because the length of the first and third waves, or A-B and C-D, are often of the same.

The GBP/EUR chart shows how based on this assumption the endpoint of  ‘D’ is likely to be much higher at 1.1800. Another more conservative estimate for the end of ‘D’ is at a 61.8% extrapolation of A-B, which is situated at 1.1500. Yet both suggest the makings of a more optimistic outlook for Sterling. 

Above: Pound-to-Euro rate shown at daily intervals.

 

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