Euro/Pound vulnerable

December 26, 2014 03:45 AM

Last week, we outlined the bearish case for EUR/GBP, concluding “If we do see rates drop through [the bottom of the symmetrical triangle pattern at .7840], a continuation down to key support at the six-year low around .7760 is possible” (see “EUR/GBP: Euro Getting Pound-ed by Rival”). That anticipated break occurred late last week, and after an oversold bounce on Monday, it looks like the bears are beginning to assert control once again.

Over the last two days, the pair has peeked back into the triangle pattern twice, but been rejected back lower each time, creating back-to-back Bearish Pin Candles*, or inverted hammers. These candlestick patterns show an intraday reversal from buying to selling pressure and suggest that EUR/GBP may resume its fall from here.

As we hinted last week, the bearish break in price was indeed foreshadowed, or at least confirmed, by both the MACD and RSI breaking down below their corresponding support lines. Now, the MACD is trending downward below both its signal line and the “0” level, while the RSI could potentially fall another 15 points before reaching oversold territory.

As of writing, a continuation lower is still favored, with minor support at .7800 and more signficant support near the 5-year low low .7760 as the next logical targets for bears. Even if rates bounce back into the symmetrical triangle next week, the overall bearish bias will remain within the long-term bearish channel at .7950.

*A Bearish Pin (Pinnochio) candle, or inverted hammer, is formed when prices rally within the candle before sellers step in and push prices back down to close near the open. It suggests the potential for a bearish continuation if the low of the candle is broken. 

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.