EUR/GBP: Is A Reversal In Play?

The EUR/GBP has staged an impressively strong downtrend on the daily chart. After making the low at 0.8647, the pair retraced exactly 38.2% before reversing and continuing down in the direction of the trend. Just as expected, a lower low was made at 0.8600.

Now price has, once again, corrected off the lows and is, so far, finding resistance at the 50% retracement level of the 2nd bearish wave at 0.8798. On the larger time frames, when the EUR/GBP corrects more than 38.2% that tends to be a signal that a reversal is developing. Mind you, it is just a signal until 50% retracement is actually exceeded.

Fundamentally, the EUR has some major digressions: sovereign debt being the biggest. But sterling is dealing with this same problem, highlighted this week by S&P’s “downgrade” saying the UK is no longer safe and stable financially. The tie-breaker, therefore, is the state of the economy and here the Eurozone is much stronger than the UK. This week alone we have seen good numbers from various countries in the Eurozone with consumer confidence higher, unemployment lower, and inflation in check. Great Britain, however, experienced paltry GDP growth, weak manufacturing numbers and weak consumer confidence in spite of still strong housing numbers.

The first area of resistance to watch on this rally is 0.8700/0.8750. If price can break above this level, watch 0.8794. A break of this level confirms that a reversal is indeed in place. As always, trade what you see, not what I think.

Lydia Idem Finkley

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