Flirts with two-week-old trading range support, around 0.8700 mark

  • EURGBP falls to a one-week low on Thursday, though shows resilience below the 0.8700 mark.
  • The formation of a rectangle warrants some caution before placing aggressive directional bets.
  • Investors now await the UK government’s financial plan to determine the near-term trajectory.

The EURGBP cross comes under some selling pressure on Thursday and extends the overnight pullback of over 50 pips from the 0.8775 region. The downfall drags spot prices to a one-week low during the first half of the European session, though bulls show some resilience below the 0.8700 round-figure mark.

The British Pound’s relative outperformance comes amid growing acceptance that the Bank of England will continue raising borrowing costs to combat stubbornly high inflation. The bets were reaffirmed by the release of hotter-than-expected UK consumer inflation, which accelerated to a 41-year high in October. This, in turn, is seen as a key factor exerting some downward pressure on the EURGBP cross.

The downside, however, remains cushioned as traders seem reluctant and prefer to move to the sidelines ahead of the UK government’s financial plan. Furthermore, talks for a more aggressive policy tightening by the European Central Bank, along with the prevalent US Dollar selling bias, underpin the Euro. The combination of the aforementioned factors further contributes to limiting losses for the EURGBP cross.

From a technical perspective, the recent range-bound price action witnessed over the past two weeks or so constitutes the formation of a rectangle pattern on short-term charts. This marks a consolidation phase and points to indecision over the next leg of a directional move for the EURGBP cross. Moreover, neutral technical indicators on the daily chart haven’t been supportive of a firm near-term direction.

Hence, it will be prudent to wait for a sustained break through the trading range before confirming the near-term trajectory for the EURGBP cross. In the meantime, the 0.8700-0.8690 region might continue to protect the immediate downside. A convincing break below will mark a bearish breakdown and drag spot prices back towards the 100-day Simple Moving Average and support, currently pegged around the 0.8610-0.8600 zone.

On the flip side, the 0.8775-0.8780 area might continue to act as a strong immediate hurdle. Some follow-through buying could lift the EURGBP beyond the 0.8800 mark, towards testing the trading range resistance, around the 0.8820-0.8825 region. A sustained strength beyond the latter will be seen as a fresh trigger for bullish traders and set the stage for a further near-term appreciating move.

The EURGBP cross might then accelerate the momentum towards the 0.8850-0.8860 resistance zone. The subsequent positive move has the potential to lift spot prices to the 0.8900 mark. The momentum could further get extended towards an intermediate resistance around the 0.8945-0.8950 en route to the next major hurdle near the 0.9000 psychological mark.

EURGBP 4-hour chart

Key levels to watch


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