EUR to GBP Exchange Rate Broke Lower – Head and Shoulders Points to More Downside
The EUR to GBP exchange rate remained close to the 0.90 level for the entire summer. The round number acted as a pivotal level, attracted the price action both from the upside and the downside.
A cross pair, the EURGBP’s volatility depends a lot on the two majors’ volatility. If the EURUSD and the GBPUSD daily movements are the same, the EURGBP cross remains flat. As a rule of thumb, whenever the three central banks involved in a cross and two majors (in this case the Fed, ECB, and BOE) have similar interest rates, the correlation between the majors increases, and the cross’s volatility decreases.
With the coronavirus crisis, all three central banks slashed their rates to zero. Also, all three restarted the quantitative easing program. Because the fiscal stimulus in the United States outpaced anything we have seen from Europe or the United Kingdom, the EUR and GBP gained against the USD.
BOE Fueling a Somewhat Strong GBP
BOE made headlines recently as a couple of months ago it signaled the bank’s intention to study negative rates in the United Kingdom. The pound dropped, but that message was quickly reversed as BOE said that negative rates work best during a growing economic environment, and not in a recession. It even reinforced the same statement yesterday.
As such, the pound traded with a bid tone, and the EUR to GBP exchange rate was sold on every bounce.
EUR to GBP Technical Analysis
The cross appears to have broken a head and shoulders pattern. Because of the long-term consolidation during the summer months, it is difficult to correctly draw the neckline.
The price typically retests the neckline, but that is not mandatory. Aggressive traders may want to go short at market and place a stop loss at the 0.90 level while targeting 0.87 – the measured move. However, the risk-reward ratio is not that good.
Instead, a better approach, at the risk of missing the trade, is to wait for a pullback into 0.8850-0.8875 before going short for 0.07. In this case, consider a higher level for the stop loss.