EUR/GBP Set for Failure at 74 Cents

EUR/GBP Set for Failure at 74 Cents

EUR/GBP Set for Failure at 74 Cents

As today’s price action has shown us, 0.7400 is a very important resistance level for EUR/GBP. Over the past month, the currency pair has either tested or come close to testing this this level on four occasions. It was also a breakout level in May and an important support level in January. Today’s failure at 74 cents is therefore very significant because it could a near term top for EUR/GBP. Technically, EUR/GBP is stuck in a 72-74 cent range and we believe that it will should drop to at least 0.7260, the 61.8% Fibonacci retracement of the long 2000 to 2008 rally.

Fundamentally, the recent rally in EUR/GBP was driven by less dovish comments from ECB President Draghi and a stronger German IFO report. However this report was taken before the VW scandal and the carmakers troubles will hurt business confidence as the auto industry is the largest industrial sector in Germany. Yet between the crash in the DAX, the VW mess and the recent weakness in PMIs, we still view euro as a better sell than buy. Meanwhile sterling finally stabilized against the U.S. dollar after falling for 4 straight trading days. We have been seeing weaker U.K. data for some time now but that has not affected the more hawkish views of U.K. policymakers who are worried about wage growth. Sterling is oversold and due for a bounce which would help drive EUR/GBP back into its range.

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