Technical Sentiment: Bearish

Key Takeaways

• EUR/GBP bounced off near 0.7900 pivot zone;
• Friday ends as a Bearish Engulfing Bar;
• Lower High likely set as Euro selling pressure mounts;

Euro likely topped against the Sterling Pound this week after two weeks of slow gains. This limited bullish rally has served its purpose as oversold conditions dissipated, allowing the downtrend to resume from this point forward.

Technical Analysis

After a brief test of 0.7765, where traders found support near July 2012 Low, Euro managed to embark on a slow correction against the Sterling Pound. Less than two weeks later and a measly 130 pips higher, price action is showing strong signs of weakness following three consecutive daily highs rejecting off 0.7890 (a large price pivot zone dating back to July this year).

EUR/GBP is currently trading at 0.7855 at the end of the U.S. session and sellers are showing no signs of taking profit, probably due to high expectations for a bearish acceleration early next week.

On the Daily chart Stochastic has almost reached overbought territory, suggesting a top is likely forming. A Bearish Engulfing Bar completes this scenario, although its size doesn’t suggest a free-fall around the corner, more likely a deliberate grind lower.

A bearish gap is likely to occur on Monday morning. For this reason many traders might prefer to keep their short positions open, exactly what we are reading from price action at this point. Below 0.7850, bears will target 0.7820 at first, followed by 0.7755/65. With a Lower High in place, we also expect EUR/GBP to decline below 0.7755 in the near future and search for a Lower Low around 0.7700.

All bearish scenarios will be temporarily invalidated (or better yet paused) if EUR/GBP rallies back above 0.7900, which would suggest a deeper correction targeting 0.7970.

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Prepared by Alex Z., Chief Currency Strategist at Capital Trust Markets