EUR/GBP – Completing an Inverted Head and Shoulders

EUR/GBP - Completing an Inverted Head and Shoulders

Failed ECB-reaction: The EUR/GBP was at first weak after the ECB statement and press conference, but as the 8/7 session wound down and the 8/8 session began, traders started to bid up the euro. We saw the EUR/GBP flash a bearish engulfing candle in the 4H chart before the market decided to counter that ECB-reaction. The failure of the initial reaction is a strong indication that the EUR/GBP is ready for a significant consolidation or bullish correction.

EUR/GBP 4HChart (8/8)
eurgbp 4h chart 8/8

(click to enlarge)

Consolidation, Kilroy:  Since July, EUR/GBP has been consolidating. The 4H chart shows the 200-, 100-, and 50- period simple moving averages converging, which is a sign of non-direction. Today (8/8), price has used the SMAs as support and pushing above cluster, giving us a bullish clue. On a pullback, price should hold north of the 0.7940-50 area if it is indeed trying to complete this price bottom.

As the market establishes the support pivot around 0.7920, it is completing the right shoulder of a “kilroy” or inverted head and shoulders pattern. A break above 0.7985 should complete the price bottom.

This is a classic “reversal” pattern. Against a very persistent bearish trend, we can anticipate some bullish correction, but let’s not get ahead of ourselves by calling for a bullish reversal against a 1 1/2 year downtrend based on a bottoming attempt in the 4H chart.

Broken Trendline; 50-Day SMA: In the daily chart, you can see the bottom attempt already breaking a falling trendline that comes from the high of this year around 0.84, connected with May’s high around 0.8250. Notice that price is again testing the 50-day SMA, which held as resistance before.

EUR/GBP Daily Chart 8/8
eurgbp 8/8 daily chart

(click to enlarge)

Next Resistance: A break above the kilroy’s neckline around 0.7985 should clear the trendline and moving average, exposing the next resistance pivot at 0.8033.

Breakout Projection: We might be able to expect a little stronger correction if we use a conventional pattern breakout projection – using the width of the pattern (head to neckline) and projecting it in the direction of the breakout. The width of the head and shoulders pattern is a little over 100-pips, so let’s just say 100-pips for now. This provides us a breakout target of around 0.8085. 

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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