The Pound to Euro's Next 'Big Break'

The Pound to Euro's Next 'Big Break'

29 March 2016, 15:01
Vasilii Apostolidi
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The GBP/EUR is moving in a broad sideways zone with its floor at 1.2577 and ceiling at 1.3000 - but a pattern is emerging that hints of a big move in coming weeks.

The heavy sell-off which characterized GBP/EUR’s behaviour in January and February looks to have found a bottom in the 1.25s, after recovering to its current 1.2750 level over recent days.

The pair appears to be unable to break lower after reaching several notable targets and important levels.

Both the 200-week and 50-month moving averages lie at the current lows, at 1.2640 and 1.2625 respectively, and provide support to the exchange rate as buyers tend to cluster at these levels slowing down any declines in the exchange rate.

The pair has also reached the 61.8% extension of the height of the head and shoulders pattern at the highs extrapolated down.

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A head and shoulders pattern occurs at the end of an up-trend and is a sign the up-trend is going to change to a down-trend.

It forms when the market rises, making a high (left shoulder), falls back, rises again making another higher high (the head) falls back and makes a lower high (right shoulder) before capitulating and breaking down. The minimum target for the move lower is at the 61.8% extrapolation of the height, which has already been reached. 

The next substantial move for the pair should come when a breakout occurs from the box-shaped sideways pattern.

A move well below the lows and the S2 monthly, confirmed by a break below the 1.2400 level would probably indicate a continuation down to 1.2280, whilst a break above 1.3050 would probably confirm a move up to 1.3220.

Given the trend before the box formed was bearish, there is a bias to a continuation lower, since the medium term down-trend remains intact as long as price doesn’t break-out above the box highs at 1.3050.

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