Through most of the spring and summer, the Euro outperformed Sterling in the wake of the UK election and the start of Brexit talks. It increasingly looks, however, like the tide has turned for the Channel Cross with Sterling regaining strength. With the UK House of Commons set to vote on the big EU Repeal bill, the Bank of England meeting later in the week and significant UK economic announcements in between, this pair could be active through the week.
Between April and August, EURGBP trended consistently upward, advancing from near 0.8300 toward 0.9300. By late August, the pair had become extremely overbought on the RSI, so the ensuing correction does not come as a total surprise.
In late August, a bearish Evening Star candle pattern formed over three days, marking a transition in control for Euro bulls to Sterling bulls. A shooting star doji candle and a failed breakout over 0.9265 signalled a buying climax at the peak.
Since then, the pair has rolled over and started to trend back downward, with resistance falling toward 0.9200 then 0.9115.
The pair has dropped to test 0.9070 a common 23% Fibonacci retracement of its previous uptrend. The RSI has broken under 50 to confirm the downturn in momentum. Next potential support may appear at the 50-day average near 0.9020 then the 0.9000 round number.
Sterling’s swings up and down continue to be driven by Brexit sentiment for the most part. GBP retreated in the month’s following the Conservatives’ electoral setback, but has rebounded as EU negotiators have started to complain about the UK’s negotiating stances. In other words, because the UK is standing up for itself and its interest, not rolling over like the overconfident EU thought it would.
This week, the UK House of Commons is expected to vote on the EU repeal bill which would enable the UK to start dismantling EU laws and regulations. Recent gains in Sterling suggest traders expect the bill to pass.
Midweek UK news includes inflation and employment figures that could indicate how much pressure, if any, Bank of England Governor Carney may be under to start cutting back on stimulus. The pendulum has been swinging back with the US and Canada each raising rates twice this year and the ECB preparing to talk tapering this fall.
On Wednesday, ECB President Juncker is expected to speak on the State of the EU, which could have an impact on the Euro side of this pair, particularly if he takes up the whining over the state of negotiations.
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