• EUR / GBP recorded a modest rally after an early plunge to new lows since the start of the year.
  • The formation of a rectangle could be seen as a phase of bearish consolidation.
  • Movement beyond the resistance of 0.8460 is required to cancel the negative bias.

EUR / GBP reversed an early decline to new current year lows and was last seen trading with modest gains, around the 0.8435-40 region.

The relative underperformance of the British pound during the first half of the European session could be attributed to long drawn out trading amid a satisfactory recovery in demand for US dollars. That said, expectations of an imminent rate hike by the Bank of England later this year should act as a tailwind for the British Pound and cap gains for the EUR / GBP pair.

Looking at the technical picture, the recent range-related price action seen since the start of this week forms a rectangle on the short-term charts. Given the recent sharp drop in the rejection of the all-important 200-day SMA, the rectangle could be classified as a bearish continuation phase in a slightly oversold environment.

Meanwhile, the upper limit of the mentioned trading range, around the 0.8460 region, now coincides with the 200 hour SMA. This should now serve as a pivot for short term traders. A sustained move beyond that will suggest that EUR / GBP has hit a near-term low and could trigger an aggressive short hedging move in the absence of a relevant fundamental catalyst.

The EUR / GBP cross could then aim to recover the key psychological mark of 0.8500. The recovery momentum could extend further to the next relevant hurdle near the 0.8525-20 supply area. Some follow-up purchases will set the stage for further near-term appreciation and raise the cross further in the mid 0.8500s en route to the 0.8575-80 region.

On the flip side, the 0.8420-15 region, or the lower end of the weekly trading range, now appears to have emerged as immediate strong support. Bearish traders should wait for lasting weakness below the mentioned support before placing new bets. The EUR / GBP cross could then become vulnerable to cross the 0.8400 mark and slide to the support area at 0.8335.

1 hour EUR / GBP chart

Technical levels to watch