The EUR/GBP has been on a sharp bullish swing since finding a low at 0.7106 in April. The 4H chart shows a bullish swing that looks like a clear bullish “impulse wave” (in Elliott Wave terminology).
We will get back to the structure later. For now, note that there is a bearish divergence between price and the 4H RSI (higher price higher with corresponding lower RSI high). This suggests a potential bearish attempt, which is already materializing. There was a bearish engulfing candle from 0.7483, then the following couple of 4h candles are cracking a rising trendline from the end of April.
In the very short-term, a break below 0.74 should clear the rising trendline, and open up at least the 0.73-0.7315 support area, which also involves the 50-period simple moving average (SMA). If a subsequent bounce finds resistance around 0.74, watch out for a head and shoulders pattern, which puts pressure on the 0.73-0.7315 level.
A break below 0.73 with the 4H RSI falling below 40 then opens up the 0.7250 area. A bullish market should probably not fall beyond that and hold above the cluster of 200-, 100-, and 50-period SMAs. A break below 0.7210 however would likely be a clear indication of bearish continuation, especially if the 4H RSI falls below 30 as well.
The daily chart shows a market shifting from bearish to sideways if not bullish. Price has broken a falling trendline, and above the 50- and 100-day SMAs. Meanwhile, the RSI tagging 70 shows initiation of the bullish momentum.
There is further upside to 0.7595-0.76 support/resistance pivot.
Now, regarding the structure, we noted that the swing since late April was an “impulse” wave, which is indicative of a trend. That is, unless it is the A or C wave of an ABC correction. The daily chart shows that there is indeed a potential ABC pattern since the March and 2015 low at 0.7014.
Yes, this analysis does not give a directional outlook. EUR/GBP is indeed at the crossroad. IF we look at the 4H chart, we have some near-term bearish outlook, but the short-term bullish outlook is still in play. In the medium-term, the bearish trend is shifting, but it could have also been an ABC correction.
These are the scenarios we have to juggle with. From a fundamental basis however, we should keep a preference for the bearish outlook because the ECB is more dovish than the BoE.
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