Inverted Head and Shoulders: The EUR/GBP has been consolidating since July in what looks like an inverted head and shoulders pattern. If so, price action last week has broken above the neckline, which signals a bullish correction against its downtrend since 2013’s high of 0.8815 (in Feb. 2013). On top of the inverted H&S pattern, price has also broke above the 200-, 100-, and 50-period Simple Moving Averages in the 4H chart. The RSI has been able to tag above 70, but has failed to tag 30, which reflects slight bullish bias.
Poor Data: Today, we got poor ZEW Economic Sentiment data for Germany and the Eurozone as a whole. We saw the disappointing sentiment data weigh on the EUR/USD as it looks poised for bearish continuation.
German ZEW Economic Sentiment
August: 8.6, Forecast 18.2, July: 27.1
Eurozone ZEW Economic Sentiment
August: 23.7, Forecast: 41.3, July: 48.1
EUR/GBP Reaction: The EUR/GBP did have a similar bearish reaction as you can see on the 4H chart. However, there is still a chance for traders to prove that it is in a period of consolidation, and even bullish correction after putting in the inverted H&S pattern.
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Testing the Price Bottom and the Bullish Correction Scenario:
In the 4H chart, you can see that price has dipped to a key support area. As price approaches 0.7940, it will be testing the 200-period SMA, with the 100-period SMA just below it. The EUR/GBP is essentially testing the cluster of the SMAs after breaking above them. The ability to come back north of this cluster would be another “slingshot” signal for the bullish outlook.
The 0.7940 area is also reinforced by a rising trendline from connecting the head with the right shoulder. You can also see that 0.7930-0.7940 is a support/resistance pivot area throughout July and August. Again, ability to hold above this area suggests bulls are still in charge.
If the market bounces up from the 0.7930-0.7940 area, the bullish correction scenario is maintained. If the 4H RSI can hold above 40 and return north of 60, it would reflect bullish continuation momentum in the 4H chart.
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Resistance: The next resistance pivot will be 0.8033, and could be the short-term target for this or next week.
Support failure: A break below 0.7930 would clear key support factors, and could revive the bearish scenario, which first has the 0.7875 low in sight. A break below that then exposes the 2012 low at 0.7764.
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