Technical studies confirm the Pound-to-Euro exchange rate can still move higher despite the declines witnessed over the past 24 hours as the market remains above some key support zones.
The British Pound started Tuesday, October 17 in rude health; rushing up to an intra-day best at 1.1236 before dipping right back to 1.1208 where we find it at the time of writing.
On paper, the Pound should be doing better - inflation data was robust and the Bank of England maintained expectations for higher interest rates in the near-future via the testimony of three Monetary Policy Committee Members before parliament's Treasury Select Committee.
And, there was nothing new to add to the persistently negative tone on Brexit either, the risks of a no-deal being reached have been telegraphed to traders on a regular basis and are in the price of the Pound.
With fundamental drivers looking opaque, it is to the charts we turn in order to understand what the structure of the market is looking like and where the Pound might go next against the Euro.
It could well be that technical considerations are driving demand and offers for the Pound, as is so often the case in FX.
Looking at the longer-term, weekly chart, we note the Pound-to-Euro exchange rate has risen above a major multi-month trend-line at 1.1150 while lower-timeframes show bulls pushing the exchange rate above it.
Major trendlines are make-or-break levels on charts as buyers and sellers tend to cluster orders around these levels which in turn influences direction.
The reveral we have seen recently could be evidence of the gravity this level continues to provide. When prices reach such levels they tend to either be rebuffed or breakthrough, and what happens tends to be an influential factor in shaping the trend.
At the present time the GBP/EUR exchange rate is finding support above the trend line which keeps us positive on the outlook. Therefore the uptrend in place since September is still intact but, a break below 1.1150, where we see support, would probably turn the tables.
Furthermore, the pair has formed what appears to be a bullish flag pattern on the longer-term, weekly chart, which reinforces the chart's bullish potential.
Flag patterns normally extend the same length as their 'pole' extrapolated higher from the bottom of the flag 'square'.
In this case, it indicates the next move will probably extend up to the 1.16s.
The 50-week moving average at 1.1495, however, is a key barrier along the way which is likely to stall bulls in their tracks and therefore presents a more realistic upside target.
Looking at the four-hour chart for shorter-term direction we note that it shows more unequivocally the pair has already broken above the trendline adding to evidence it will extend higher.
It has also now established a new sequence of rising peaks and troughs, with two higher highs and two higher lows, indicating the short-term trend may well now be up.
We look for a break above the 1.1291 highs for confirmation of more upside with a target at 1.1345 calculated by taking the move prior to the trendline break ('x') and extrapolating it higher after the break ('y').
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Taking a step back, and looking at the chart from a longer-term perspective we are able to note that recent moves, and projected moves in the above analysis, still leave the market at familiar levels.
Indeed, the rate is well within values seen already in September and October leading technical analyst Lucy Lillicrap at brokers AFEX to suggest the impulsiveness of both prior gains and more recent weakness is enough to keep values here range bound for now.
“The manner in which this pair reversed (higher) from 1.0750 or so looks sufficient to confirm an intermediate bottom and broader negative trends thus appear on hold again,” says Lillicrap who is more interested in the longer-term picture.
Lillicrap cautions that “insufficient basing work exists to enable a sustained extension beyond 1.1400 (pivot point) with resistance evident at 1.1350 or 1.1450 areas initially.”
In the mid-week session, traders will be eyeing the release of UK labour market data for guidance at 09:30 where analysts are forecasting the all-important wage index to grow by 2.1%.
Whichever side of this number the actual figure falls will likely set the tone for Pound Sterling over the next 24 hours.