The EURGBP has been moving higher since the middle of April but we have good reasons to believe that upside momentum has stalled and in fact we are reversing lower. This is the part that we need to remind to readers that trying to time reversals is a low probability but high reward “game” which you need to know how to “play” to come out on top. The key element is having a well defined R/R ratio and a confluence of technical levels that show that a reversal is likely. In this case the signals are A) a key reversal outside black candlestick on the weekly chart (strong reversal candles on the weekly chart are to be respected), B) an ascending wedge formation that broke to the D/S, C) a discrete RSI divergence and D) a key reversal on the daily chart the past Wednesday. Today the pair is re-testing the broken wedge support as resistance by posting an inside white candle and if this level fails to reject the reaction then we are monitoring 0.8870 (the 61.8% Fib) as a possible resistance zone. A break and close above 0.89 obviously invalidates our view. The minimum R/R is better than 1:1 since our 1st target is at 0.8650 while the pair is currently trading at 0.88.
Technically, the EUR/GBP produced an interesting development during the past couple of days. The pair had rallied through a bunch of horizontal resistance and a key Fibonacci level at .8875 (which is the 61.8 retracement level) and looked like we were on our way to .9000. Then, the following day, we reversed sharply and the RSI posted a divergent reading. Since then, the EUR/GBP has been trading somewhat “heavy” and now with all the sellers “stopped out” and fresh longs finding themselves on the wrong side, the risk is tilted to the downside. The fact that we never made it to .9000, may end up putting some downside pressure on, especially should any positive Brexit developments emerge.
The Elliott Waves Perspective
EURGBP turned sharply lower at the end of last year, and formed a nice spike at 0.9600 area which appears to be a significant top as a much deeper correction can be taking place if we consider the impulsive 1300 pip drop down to 0.8300 in December 2016. We see that move as a wave A, the first leg of a three wave drop that is expected to continue to much lower levels by the end of 2017. We anticipate a decline into the third leg of wave C that can still be in the early stages if we consider the recent turn down from 0.8950 and beneath the channel support line. Based on the E.W. principle there is room for a sizable move to 0.8100 area or even 0.7760 in the month ahead, while the market is trading beneath the October 2016 highs.