Brexit
The EURGBP pair bounced from the 0.8860 area and now threatens to move back above the 0.90 level. A combination of technical and fundamental factors drove the reversal, and now the momentum indicates further upside potential.
This is the ECB week as on Thursday, the central bank is announcing its interest rate decision. The expectations are high that the ECB will deliver more stimulus due to the Euro’s strength and the fall in inflation towards the zero level. As a reminder, last week the core inflation dropped to 0.4%, threatening to undermine the ECB’s price stability mandate.
Tomorrow starts a new round on the Brexit talks. The post-Brexit transition period expires in December and the two parties try to reach a deal until the deadline.
However, the U.K. Prime Minister, Boris Johnson, remains optimistic about the ability of the country to prosper with or without a deal in December. Many voices argue that Brussels’ unrealistic terms will make it impossible for a deal to be reached, further fueling the EURGBP rate higher.
The cross pair dropped from above 0.90 towards the 0.8960 area, as the EURUSD retraced from 1.20. By the time the EURUSD reached the 1.20 the ECB’s Chief Economist had intervened and said that the EURUSD exchange rate matters for the central bank.
From that moment on, the Euro corrected across the board, with the EURGBP pair being one of the pairs the dropped. But it formed a falling wedge coupled with a bullish divergence with the RSI – reversal conditions warranting more strength in the period ahead.
To trade it, bulls might consider remaining on the long side with a stop-loss just below the 0.8860 level. A proper take profit level is derived from projecting twice the risk from the entry level. Also, conservative traders might consider booking partial profits at the 0.90 level.
