Euro Remains Unconvincing Against the British Pound

The EUR to GBP exchange rate has broken above, and then fallen back into, its falling channel - what does this mean for the outlook?

euro exchange rate 3

Trading at 0.7830, the EUR/GBP pair pulled-back to the channel line it had just broken out of, in what technical analysts call a 'throwback' also  known as a 'return move'.

Throwbacks are essentially just temporary setbacks before the trend in the direction of the breakout resumes.

The question analysts are asking themselves now, is, is the pull-back on EUR/GBP a throwback or the start of a deeper decline?

EURGBPJune08

In favour of the idea that it is a return move is the fact that the pair is starting to recover, rising from lows of 0.7754 to the current 0.7815.

This is also against the release of sterling-positive data this morning which showed a 2.0% rise in Industrial Production in April from -0.3% in March, and a 2.3% increase in Manufacturing Production in the same month, from a 0.1% previous result. 

The views of other analysts may also help.

Brexit adviceBut Commerzbank's Karen Jones does not mention the trend-line, channel or existence of a 'throwback'.

She is bearish longer-term ever since the pair developed a bearish head and shoulders (H&S) topping pattern with the April peak forming the head.

The as yet unmet downside target for the H&S at 0.7360 implies outstanding downside.

Yet in the short-term Jones is bullish, saying that only a break below 0.7736 would "alleviate upside pressure."

We don't agree with her longer-term bearish stance anymore as the H&S pattern has been compromised by the break above the trend-line connecting the head and the right shoulder, which is also our falling channel line, (see Pring, Technical Analysis Explained, 4th Ed, p85).

This leaves Jones's short-term bullish stance, which favours the concept of a return move and resumption higher.

Lloyds Commercial Banking's Robin Wilkins does not refer to a 'return move' as such, either, and overall appears to be neutral as he remains unsure of whether the move down from the 0.8117 highs was "merely corrective" or not.

For Wilkins it would require a move above the 0.7910/20-40 zone to confirm a resumption
of the up-trend to the next target at 0.8200.

Meanwhile a break below 0.7765 would risk further weakness.

Euro / Pound Sterling's Rally Unconvincing: Hantec's Perry

Having studied the euro/pound sterling charts, analyst Richard Perry at Hantec Markets says the euro is failing to convince him that it can establish a sustainable uptrend.

"The technical outlook will still not turn decisively against sterling until a close above the right hand shoulder high of the old top pattern at £0.7945. Ultimately, I see this recent rally on Euro/Sterling will prove to be another chance to sell," says Perry. 

The caveat however is that sterling strength would have to be triggered by the UK voting to remain in Europe.

Nevertheless, "the technicals are rolling over again and suggest that the recent rally is running out of steam now," says Perry. "the RSI is failing below 60 having put consistent pressure on 30 (which suggests a bear market rally), whilst the Stochastics are crossing lower again in a similar fashion to the May sell signal."

EUR to GBP Chart

Perry has spoken previously about the old long term key pivot at £0.7750 and this caught the reaction low on Tuesday, but I expect this will come under further pressure in the coming days.

This week’s rally high at £0.7905 is resistance and could easily now look to form another lower high under £0.7945.

"However, the £0.7750 pivot is key to the outlook near to medium term now as it protects a deeper move lower back towards initially the old neckline at £0.7690 but also possibly the May lows again at £0.7560," says Perry.