The Euro to Pound Sterling Exchange Rate has 'Topped'

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The EUR to GBP exchange rate has found support after April's notable sell-off, where do some of the industry's leading analysts see the pair moving next? 

The EUR/GBP exchange rate continues to flirt with recent lows towards 0.7749 reinforcing the perception the pair's strong rally has topped and is now rolling over into a new extended down-trend.

GBP remains well bid across the board, against the dollar we have seen the currency blast through 1.44c at the end of last week and 1.45c yesterday, overnight it broke through 1.46 before retracing a little to 1.4580.

Traders have been net short GBP as Brexit fears rose, but current polling and sentiment suggests that those fears might have been overdone and the currency is now on a reverse course.

Markets believe that the pound sterling was punished unfairly and should rather be trading closer to fair-value.

Concerning the outlook, what are the charts saying about the recent sell-off in the pair, and how much lower can we expect it to go?

We note that the pair is seen resting above its 100 day moving average support zone; moving averages on the EUR/GBP are quite instructive as traders are seen to place orders either side of these lines.

There will be a solid supply of sterling around the 100 day moving average so we would expect support to hold out. However, should the euro break below here then we will certainly be in negative territory.

Top in Place

Commerzbank’s technical analyst Axel Rudolph sees a top now in place at the 0.8116 highs, and a downside target at 0.7685, both in his short-term and longer 1-3 month view:

“We view the currency pair as having topped at .8116 and expect it to decline over the next few weeks, soon reaching the .7755/.7654 area. It is where the January high and the March low can be seen.”

Only a break above last week’s 0.7992 highs would change Commerzbank’s basically bearish view:

“Immediate downside pressure will be maintained while no rise above last week’s high at .7992 occurs.”


Sell Rallies

The stance is echoed by FX broker’s Hantec, whose analyst Richard Perry, sees a marked change in the medium term outlook, especially now a key support band between 0.7830-0.7930 has been broken:

“I have talked previously about the support band £0.7830/£0.7930, however this level has now been breached and I see this as a decisive medium term breakdown.”

He further adds that momentum indicators and the break below the key 55-day moving average are further signs of a declining outlook:

“The move has seen the pair below the 55 day moving average (currently £0.7855) for the first time since early December, whilst the RSI has also dropped below 48 and to a near 5 month low (as have the MACD lines).”

Much like Commerzbank’s Rudloph, Perry also sees the 0.7650s as an eventual downside target:

“This all points towards growing corrective momentum and a move back towards a test of the next key support band £0.7650/£0.7700.”

Perry, furthermore, dismisses the rebound this morning (which filled the opening gap), as nothing more than an opportunity to sell into the down-trend:

“The hourly chart shows the continued slide of the past couple of weeks and that any unwinding of the hourly RSI back into the 50s seems to be seen as a chance to sell. The overnight bounce from £0.7745 could prove to be that chance, with initial resistance between £0.7850/£0.7900.”

Hantec’s analyst highlights the 21 and 55 hourly moving averages as target areas for pull-backs to encounter resistance.

Up-trend finally Broken

Lloyds Commercial Banking’s Robin Wilkins, is also now bearish after a move below the 0.7880 level broke the integrity of the medium term up-trend:

“Medium term, the trend from the 0.6935 lows set in July 2015 remains intact. A decline through daily trend support at 0.7925-0.7880 would add increasing weight to confirming a significant top is developing.”

Wilkins also sets the bar quite high for a resumption of the up-trend, saying, it would take a clear break above 0.82:

“Only a clear breach of the 0.82 region would suggest that isn’t the case (that a bearish outlook isn’t the case) with little meaningful resistance above till 0.84 and then 0.87.”


Mind the Gap

One note of caution: the gap on the morning of Monday 25 appears to be what technicians call an exhaustion gap, and this could mean the short-term down-trend may have run out of energy.

Whilst it does not necessarily indicate a resumption of the up-trend from the June 2015 lows, it may herald the onset of a stronger-than-average corrective recovery, to perhaps as high as the 50-day moving average at 0.7861.

Whether or not the exchange rate then breaks clearly above the 50-day will probably determine if there is a resultion of the up-trend into the 0.80s, or whether the down-move continues lower to the cluster of analysts’ targets in the 0.76s. 

If the market does not rotate at the gap then it is not an exhaustion gap, but could be a measuring gap instead. If so it indicates it is the mid-point of a move in the direction of the trend -  which for EURGBP could mean a move down to the 0.73s.