EUR/GBP Trade Idea: Fade the Rally

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EUR/GBP Trade Idea: Fade the Rally

The EUR/GBP started this week breaking below a short-term consolidation range that ended last week Today, as we can see in the 1H chart. It got a little bounce after the UK CPI data.

UK CPI y/y (March): 0.0%
Forecast: 0.0%
Previous: 0.0%
ukcpi032015
(click to enlarge; source: forexfactory.com)

The annual inflation rate in the UK declined in 2014 into 2015, which has shifted the BoE’s stance from slightly hawkish to slightly dovish. This has pressured the pound against the USDbut against the euro it has been strong. This is because the ECB has been even more dovish for longer and has implemented quantitative easing. The euro is the weaker of the two currencies at the moment, and even though UK’s annual inflation remained at 0.0% in March,  at least, there was no further dip in the annual inflation rate as we have seen for 4 months in a row.

EUR/GBP 1H Chart 4/14
eurgbp 1h chart 4/14
(click to enlarge)

The market’s initial reaction to the inflation data was for the pound against the euro. The EUR/GBP rebounded as we can see in the 1H chart. From a technical perspective this is a pullback after a breakout which will test the determination of bears in the market.

If EUR/GBP is going to confirm the bearish breakout, it will put pressure back towards the 0.7180 level with risk of falling further. In this scenario, the current pullback should find resistance around where it is now, at the previous support. We can give it some elbow space during the 4/14 session, maybe up to 0.7240. However, if it starts to crossing above 0.7250, we are likely going to see some consolidation in the next few sessions.

EUR/GBP 4H Chart 4/14
eurgbp4hchart04142015
(click to enlarge)

In the 4H chart, we can see that the break below last week’s range was also a breakdown of a medium-term range roughly between 0.7223 and 0.7383. The downside risk from this breakout will first be the 0.7150-0.7175 support/resistance area. Below that, the 0.70 psychological level up to the 0.7014 low on the year will be in sight.

Remember we mentioned that based on the 1H chart, a break above 0.7240 would signal further consolidation in the near to short-term. Well, it would signal a pullback in the 4H chart to test the broken top (some will call this a double top). In this scenario, if price can hold under 0.73, the short to medium-term outlook will remain bearish.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.