Predictions based on technical studies confirm the British Pound is likely to maintain an advantage over the Euro in the near-term.
Our call comes as the EUR/GBP exchange rate trades at 0.8489 - well off the highs recorded at 0.8670 on December 29.
Indeed, it is the spectacular reversal off these highs that have turned us more bearish on the Euro's prospects at this juncture.
From a technical perspective, the EUR/GBP chart carries a downside bias after the long bearish candle which formed on the 30th when the pair looped like a rollercoaster.
That day’s range formed what the Japanese call a “Nagareboshi shokudai” or “shooting star” candlestick (circled below).
The shooting star is especially bearish when it is longer-than-average as is the case with this one.
The fact it pushed well above the top Bollinger band, which is a violet-coloured envelope around price (see chart below), indicated the exchange rate reached an upside extreme and this enhanced the chances of a recoil back down towards ‘mean’.
So far this has happened and there is an increased chance of it continuing.
A major obstacle to further downside, however, is the monthly pivot (PP) lying right under the current exchange rate, at 0.8497.
This is likely to prevent further descent as traders often trade against the trend at pivot levels, trying to profit from the bounce.
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A clear break below the 0.8450 level would confirm the pivot decisively overcome and signal a probable continuation down to a target at 0.8360.
Commerzbank’s Karen Jones, in a note seen by Pound Sterling Live, is also bearish EUR/GBP, saying:
“We view recent strength as corrective only and favour failure.
“We maintain a negative bias and look for a retest of the recent low at 0.8304 and the 200-day ma at 0.8347.
“Failure here will trigger another leg lower to the 0.8170 50% retracement.”
Whilst Jones is bearish until and unless 0.8725 is breached, we remain bearish below the shooting star highs at 0.8668.
A break above that, although unlikely, would probably lead to a move up to 0.8800.
Positives for the Pound, Caution on the Euro
The Pound has started the new week in decent form thanks to better-than-forecast manufacturing data out of the UK.
Meanwhile on the all-important sentiment front the UK currency advanced against the Euro as Theresa May sent an inclusive New Year’s message saying she would represent all those in Britain at the forthcoming Brexit negotiations, not just the 52% who voted to leave.
The Euro meanwhile weakened slightly after reports that a respected German economist and head of the Ifo think tank, had warned there might be a political backlash in Italy against the EU unless living standards, which have remained unchanged for 16 years, rapidly improve.
The comments reminded traders that Eurozone politics remains a big risk over the course of the next 12 months with traders wary the continent could endure similar unexpected outcomes to that produced by the big votes in the UK and US in 2016.
Meanwhile, a strong Eurozone manufacturing PMI result in December reminds us that the Euro is likely to benefit from a strengthening Eurozone economy.
The December manufacturing PMI showed a rise to a 5-year high, reinforcing the view that the Eurozone economy continues to grow, albeit at a slow pace:
Eurozone Manufacturing PMI hits a high not seen since 2011
Data such as this should remind foreign exchange traders that the European Central Bank could well be justified in ending its massive asset purchase programme in 2017.
The asset purchase programme - designed to boost the Eurozone economy - has kept the Euro under pressure for years now.
Its ending will likely be the trigger to a protracted period of recovery in the Euro.