GBP/EUR Technicals: 1.1450 Watershed in Sight

The Euro retains its crown as the best-performing currency in the G10 space for 2017.

Investors see an improving economic scenario and stronger political stability as providing a more attractive investment proposition.

“Demand for Euros remains strong and steady,” says Samarjit Shankar, Managing Director, Head of iFlow and Quant Strategies at Bank of New York Mellon. Shankar has been watching the movement of funds into Europe for some time now and finds no surprises in the currency’s recent outperformance. 

This stability has seen markets rush to price in a normalisation in monetary policy at the European Central Bank with many now expecting the ECB to signal such a move at its June policy meeting.

Most analysts now see the Euro as having positive long-term prospects as a result.

This is reflected on the chart of GBP/EUR in the recent move down from the peak in April when one Pound could buy you 1.20 Euros to the current 1.16 level:

Our studies suggest GBP/EUR has formed a ‘triangle’ pattern and is in the process of completing the fifth (‘E’) wave; triangles are composed of a minimum of five waves so this could be its last wave.

Technical studies, such as this, rely on charts to convey information about the underlying structure of a market and allow us to make good presumptions about future investor behaviour.

As such, after completing, the triangle should breakout in a highly volatile move either higher or lower.

Given the longer-term bearish outlook for the pair (Euro strength) we see a higher chance of a downside break.

There are several obstacles to a break lower, however, which we would like to see overcome for confirmation of a bearish breakout.

Both the lower border line of the triangle and the S2 monthly pivot need to be broken below for confirmation of a bearish scenario.

A break below 1.1450 would satisfy those criteria, and then probably eventually reach a target at 1.1150, calculated by extrapolating the height of the triangle lower.

One further technical feature on the chart suggests more downside, which is the smaller triangle which formed at the wave ‘D’ highs (outlined in red), which completed in a bearish breakout.

It is often the case on charts that patterns ‘echo’ and repeat, providing clues to future activity and we think that the larger triangle which is ending could be the echo of the smaller triangle.

This would further suggest a downside break in line with the smaller originating pattern.

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