Pound Positioned for Technical Rebound Against Euro
Image © Anthony Brown, Adobe Stock
- Large 200-day moving average provides Sterling with support
- EU about to approve UK-wide backstop
- May to face 1922 committee on Wednesday
The Pound-to-Euro exchange rate is seen treading water around the 1.13 area on Thursday, October 25 as the market maintains a wait-and-see approach with Sterling being hamstrung by Brexit negotiations and the Euro fretting about the ongoing tensions between Italy and Brussels over the Italian's proposed budget for 2019.
The market could very well be technically driven over coming days with traders looking to ignore the fundamental noise and focus on the structure of the market.
"One of the main advantage when looking at the markets from the perspective of technical analysis is that a narrative is not required to understand market sentiment," says Piotr Matys at Rabobank.
Of late, the Euro has pulled back higher in a classic, three-wave, correction and is now looking increasingly like it is in position to resume its previous downtrend suggest our latest technical studies.
Such a move would be indicative of the potential for a move lower by the Euro and a jump in Sterling.
Our latest studies of the EUR/GBP exchange rate chart notes the pair has corrected back up from the 10th of October lows to recent highs of 0.8830 in response to Sterling's recent bout of weakness. In the process, EUR/GBP looks like it completed a classic three-wave 'abc' corrective pattern.
These patterns are ultimately counter-trend in nature, therefore we would expect the medium-term trend of Euro weakness and Sterling strength to exert itself once more.
The pair has also just backed into the 200-day moving average (MA) at 0.8838 and rotated mildly after touching the MA. The 200-day poses a further obstacle to more upside.
"EUR/GBP is pretty much sitting on its 200-day moving average," says Kit Juckes, a foreign exchange strategist with Société Générale.
Large MAs are often pivotal points on charts and the 200-day could very well provide the technical catalyst for a reversal lower.
A break below the 0.8798 October 23 lows would probably lead to a continuation down to a target down at the 0.8730 lows initially.
Analyst Robin Wilkin with Lloyds Bank says the broader technical outlook, however, still favours a move to the downside and "a retreat through 0.8725 is needed to confirm a deeper pullback towards 0.8680/20 medium-term support."
The exact same arguments obviously applies to the inverse GBP/EUR:
In the case of GBP/EUR, we expect the pair to probably resume its uptrend towards the 1.1460 highs. Such an extension would be confirmed by a break above the 1.1364 October 23 highs.
Translating Wilkin's assessment of the EUR/GBP outlook into GBP/EUR terms, the analyst still favours a move to the upside and a climb through 1.1461 is needed to confirm a stronger advance towards 1.1520/1.16 medium-term resistance.
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