Key Points:
- Price action is retreating away from the upper channel constraint
- Dynamic support from the 20 DMA is looming
- Watch for a breakdown in the coming days with downside targets around 0.8421
The euro-pound has largely exhibited a sideways direction over the past few months as price action’s movements have mainly been constrained by a channel. Subsequently, there have been plenty of trading opportunities as the pair has meandered, relatively reliably, between the two extremes. So it will likely not be missed that another setup has appeared on the daily timeframe that could see the EUR/GBP reversing in the coming days.
In particular, a cursory review of the technical factors highlights a particularly interesting pattern. Presently, price action has touched upon the upper channel constraint and is now slowly pulling back towards the 20 DMA. In addition, both the RSI and Stochastic Oscillator’s are declining, within neutral territory, thereby suggesting that the downside pressure is building for the pair. Interestingly, there is also a bearish crossover in progress on the MACD which further supports the short side contention.
Fundamentally, the market is also still in shock from the recent ECB announcement that the inflationary forecasts have been slashed for the pair until at least 2018. This has largely put a dampener on speculation that we might have seen a rate rise from the central bank this year.
In contrast, the Bank of England’s inflation outlook is strengthening and we might just be getting to a key inflection point where they will need to act to contain it. Obviously, this would lead to a relatively rapid appreciation for the pound over the medium term.
Ultimately, the pair’s direction in the coming days is relatively clear as the majority of technical indicators favour a downside move. The opening salvo is likely to start with a breach of the 20 DMA with any concerted move lower bringing a sharp change in momentum.
The most likely scenario is that the bearish pressure will result in a downside move back towards major support at 0.8421. Any additional declines are relatively unlikely given the presence of a triple bottom and additional support factors.