With major economic events in February from both the U.K. and Euro zone, we’ve got a solid technical setup to check out that could lead to a swing or longer-term play on EUR/GBP.
EUR/GBP: Daily
Yesterday, my friend Niko pointed out a very solid chart setup on EUR/GBP, so I decided to dig a little bit deeper into the pair for a potential trade idea.
Price Action
As we can see on the daily forex chart above, the pair has been in a solid downtrend since September of last year with clear swing tops and bottoms along the way.
After a spike higher last week, the market is on its way back to the falling ‘highs’ pattern, which coincides with the latest Fibonacci retracement levels and an overbought signal from the stochastic indicator.
We can also see that the candlesticks just formed an Evening star (a bearish triple candlestick pattern), and as we’ve seen in the recent past, bearish candlestick patterns have preceded turns lower in price. That raises the odds of this week’s pattern drawing in technical bears once again.
Fundamentals & Catalysts
Fundamentally, it’s likely been the divergence in monetary policy moves/speculation that’s fueled the downtrend in EUR/GBP. The Bank of England has been in rate hike mode (hiked last week to 0.50%), while the European Central Bank holds off on rate hikes. The ECB also continues to view the current high inflation environment as transitory.
And while it looks like the ECB is starting to warm up to rate hike possibilities lately, odds are that it’ll be a very long while before we see interest rate tightening in the Euro zone, especially if economic data and sentiment continues slowing ahead.
And speaking of what’s coming ahead, we do have several major catalysts in February that could influence the next directional move for EUR/GBP. Most notably, a U.K. GDP update this week, then U.K. CPI data next week, and finally, Euro zone / U.K. business sentiment data near the end of the month.
Overall, if the data continues to point to high inflation in the U.K. while European business sentiment data slows, then this bearish technical setup may have legs to continue the trend lower.
For longer-term or swing traders, be on the look out for these events and structure trades accordingly (i.e., adjust your position size as market data and price action confirm/invalidate your long or short thesis).
But what do y’all think? Is this the swing top for EUR/GBP and will it return to the downtrend? Or will the falling ‘highs’ pattern break?
