If that is an exchange rate that did not move this summer, this was the EUR to GBP rate. It simply hovered around 0.90, a magical number for both bulls and bears. Every time the price tried to escape higher, it failed. On the other hand, every break lower was followed by a sharp rebound back to the round number.
Lately, the bounces began to fade. The pair made only lower highs, a typical series showing trend’s exhaustion. A break below the neckline of a possible head and shoulders pattern points to more weakness for the EUR to GBP exchange rate.
The EURGBP cross was one of the main beneficiaries of the strong inflows into the Euro pairs since the Recovery Fund was announced. Joint European debt sharing sent the Euro higher across the board.
But the British Pound benefited from a weak dollar too. It rose dramatically from 1.15 to over 1.30, fueled on speculations of a Brexit deal and massive USD printing out of the United States.
Both flows out of Europe and the U.K. influence the EUR to GBP exchange rate. The imbalances between the flows determined the long-term consolidation we see on the EURGBP pair.
Positive data out of Europe also boded well for the cross. The GDP declined in the second quarter was much smaller than the one in the United Kingdom, keeping a bid on every EURGBP decline for the entire summer.
The pair seems to form a head and shoulders pattern. After the GBP was crushed at the start of the pandemic, it quickly recovered and, for the past four months moves in a correlated fashion with the Euro.
A break below the neckline opens the gates to a move to the 0.87 area, as suggested by the measured move. The bearish scenario remains in place if the market does not reverse above 0.91.
