GBP/EUR: Stormy Clouds Over Westminster In The Short Term

|
Includes: DEUR, DGBP, DRR, ERO, EUFX, EUO, FXB, FXE, GBB, GBPS, UGBP, ULE, URR
by: Sandeep Singh Ahluwalia

Summary

In the past one month, the British Pound has fallen against the Euro from a high of 1.1346 to a low of 1.1182.

Bank of England’s consumer credit level in September stood at £0.785 billion.

The short term technical picture of the British Pound looks bleak, all thanks to a Tweezer Top candle pattern.

For the past one month, the British Pound (FXB) has had a rough time against the Euro (EUO, FXE). I say that as the Sterling has fallen from a high of 1.1346 to a low of 1.1182. However, last week the Sterling managed to turn the tables as it had a strong bullish recovery against the Euro. Nevertheless, I believe the bullish run has come to an end as I expect the British Pound to fall till the 1.1361 mark. Thus, to establish the likelihood of this occurring, I shall look at the fundamental news affecting the pair, whilst also analysing the charts using technical analysis tools.

Fundamental news:

Brexit:

The key reason I believe Sterling’s bullish run has come to an end is due to the latest Brexit news dampening investor sentiment. This is as investors last week believed that a Brexit Deal will be occurring by Friday. However, this proved to be untrue as the much-awaited cabinet meeting on Brexit ended without any significant announcement. This was made worse when Chief European Union Negotiator Michel Barnier told the press that “we are not there yet”. Hence, I expect the failed cabinet meeting to affect the value of the Sterling negatively. However, if a Brexit deal does occur then this would trigger a strong bullish rally in the Sterling.

British Statistics:

The Bank of England's consumer credit level in September missed analysts estimates as it stood at £0.785 billion against an anticipated level of £1.2 billion. Moreover, this is a steep decline from the prior month’s value of £1.215 billion. Thus, due to this I expect the British Pound to face a great deal of bearish pressure in the coming days. Furthermore, this was not the only statistic that performed poorly. I say that as in September the Bank of England saw a decline in mortgage approval levels. The statistic fell from a prior value of 66,100 to 65,270.

Eurozone Unemployment Statistics:

Eurozone’s unemployment data was released this week. The European Union unemployment rate met analyst’s expectations as it came in at 8.1%. Moreover, it also remained unchanged from the prior month’s value. On the other hand, Germany released its unemployment rate for September and the value stood at 5.1% on a year to year basis. This is line with analyst expectations as they had it pegged at 5.1%.

This uniformity in the Eurozone’s statistics is one of key reasons I expect the British Pound to fall in the coming days. This is as the statistics are in line with market expectations plus are not bearish in nature. Hence, this will result in the Euro holding its ground which in turn will cause the British Pound to have a decline in its value.

Technical analysis:

Daily Chart:

GBP/EUR Daily chart The pair’s daily chart indicates that in the coming days the British Pound will be falling against the Euro. The reason I expect a bearish fall to commence is due to formation of a “Doji” candle pattern and a “Tweezer Top” candle pattern. The Doji candle pattern indicates to investors that the trend has gone from bullish to neutral. However, the Doji candle can be classified as bearish due to the formation of a Tweezer Top candle pattern. This pattern psychology indicates to investors that the tide of the market has changed from one in which the bulls were in control, to one in which the bears are calling the shots. Moreover, the bearish pattern is reinforced by the fact that the Tweezer Top pattern formed at the 161.8% fibonacci resistance level at 1.1477.

On the price target front, I expect the Sterling to fall till the range between the 38.2% and 50% fibonacci support levels. The 38.2% fibonacci support level is at 1.1389, whilst, the 50% fibonacci support level is at 1.1361. However, if the British Pound does breach the 50% support level, then I do not expect the fall to go beyond the 61.8% fibonacci level at 1.1333.

On the indicator facet, the RSI has just broken below the 70 mark, thus, supporting the notion that the Sterling will be having a descent. Furthermore, the ADX has turned flat, hence, signalling to investors that the bullish trend has stalled.

Weekly chart:

GBP/EUR Weekly chart The pair’s weekly chart indicates that the bullish rally has stalled. The reason I say this is due to the Sterling reaching a candle and fibonacci resistance level at 1.1477. Moreover, the pair has formed a “High Wave” candle pattern at this resistance level. This candle pattern psychology indicates to investors that the market is confused or as the Japanese say the market has “lost its sense of direction”. Moreover, the candle pattern’s upper wick has broken out of the Bollinger band’s top end, thus, confirming to us that a change in trend will be occurring.

The Big Picture:

Overall, I am leaning towards the bears pushing the value of the Sterling to the 1.1361 mark. This is driven by the fact that the technicals and fundamentals support a descent in the currency's value till that point. However, once it falls to the above-mentioned level, then I do expect the Sterling to have a strong bullish recovery. This is as the Sterling has just crossed over its Ichimoku cloud, which shows that the fall is merely a resting period for the bulls.

Good luck trading.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.