- EUR/GBP has fallen to a cluster of support at the level of the lower trendline of its falling channel.
- There is a good chance the pair could find its feet and recover from this key technical level.
EUR/GBP continues descending within a falling channel, clearly visible on the 4-hour chart below.
The declining sequence of peaks and troughs supposes the pair is in a short-term downtrend, and given “the trend is your friend” this biases prices to further weakness.
However, even strongly trending prices experience pull backs from time to time, and EUR/GBP has reached the lower channel line of the channel where previously it found support and began counter-trend reactions back up inside the channel. There is a chance the same may happen again.
EUR/GBP 4-hour Chart
Further supporting the pull-back hypothesis is the fact the Relative Strength Index (RSI) is heavily oversold. Although this alone is not enough to signal a recovery it does caution traders not to add to their short positions. Those wishing to trade the counter-trend rally should wait for RSI to exit oversold and re-enter neutral territory before placing buy orders.
EUR/GBP is also testing both the 200-period Simple Moving Average (SMA) and the 0.618 Fibonacci retracement level of the late-June and early-August rally at 0.8478. On the daily chart (not shown) it is also testing the key 50-day SMA. This confluence of support further increases the probability of a recovery unfolding.
The price itself is forming what might end up as a bullish Hammer Japanese candlestick reversal pattern on the current 4-hour bar, however, until the period ends it is not possible to be certain. For such patterns to gain confirmation they also need to be followed by a bullish green candle.
It is possible – given the short-term downtrend – that EUR/GBP could break below the channel line and continue falling. A decisive break below the lower channel line would validate such a breakout. It would be a very bearish sign but unlikely to last as such moves are often signs of exhaustion.
A decisive break would be one accompanied by a longer-than-average red candlestick which closed below the channel line near its low, or three red candlesticks in a row that broke below the level.
The long-term trend (weekly chart) is still bearish whilst the medium-term trend is bullish.
