Technical Update: Pound Reaches First Major Obstacle in its Recovery against the Euro
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- GBP/EUR hits speed-bump at 1.1150 level
- Needs to break out of channel to confirm short-term trend change
- Next target at 1.1219-20 where 50-day MA and range floor are situated
The Pound-to-Euro exchange rate rebound by over 1.0% on Wednesday after comments from Michel Barnier suggested the UK might get a bespoke Brexit deal, and this took the pair from the lower 1.10s to the lower 1.11s - a whole cent higher.
Follow-through price action has seen the pair trigger a weekly best at 1.1167 but our short-term technical studies are warning the pair has reached an obstacle in the road which needs to be crossed for it to unlock the next set of targets in the 1.12s.
Readers of Pound Sterling Live will recall a note out mid-week that said GBP/EUR was aiming for a target in the mid-1.12s based on our technical studies conducted at the time.
The obstacle is the upper border of a falling channel which the pair has been trading in since the June highs.
The upper channel line is likely to resist further upside, like a trendline, but, if GBP/EUR manages to break above it, which would be signalled by a break above 1.1170, the exchange rate would get a massive green-light for a continuation higher.
The pair may well pause at the channel line, however, or even pull-back within the channel.
In many ways it is a 'binary' moment for GBP/EUR - if it breaks higher, that will support the fledgling recovery, on the other hand, if it falls back down, the downtrend remains intact and there is the potential for deeper penetration.
The extremely strong up-day on Wednesday is a strong indicator itself of higher prices to come as new uptrends are often first conceived from volatile updays.
Yet even if the pair successfully breaks above the upper channel line it is likely to be limited in how much higher it can go. Two major obstacles lie not far above - the 50-day MA at 1.1219 and the floor of the mulit-month range the pair was in since autumn 2017 at 1.1220.
Even if the pair were to break above 1.1170, therefore, confirming a breakout from the channel, the next target would only be 49 basis points higher at 1.1219 and the 50-day MA.
Major moving averages tend to act as dynamic support and resistance levels where a trending exchange rate often stalls, pulls-back or reverses, so this makes it the ideal place to for our next target.
The only way prices would be expected to break above the 1.1219-20 resistance band would be if the news which led to the channel breakout was exceptional, far reaching and game-changing, as this would trump technical considerations.
On Wednesday, after the initial spike higher, we said it was too early to say for sure whether the trend and turned, but that there was lots of corroborating evidence to suggest it had.
We said we would ideally wish to see a sequence of two higher highs and higher lows before confirming the start of a new short-term uptrend and, therefore, adopting a bullish continuation bias in our forecasts.
This remains our position, although a break out of the channel, confirmed by a move above the 1.1170 level would provide the required confirmation to indicate the short-term trend was now probably up rather than down and suggest higher prices on the horizon.
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