EUR to GBP Inverse Head and Shoulders Hints at Divergence Between ECB and BOE?

UK Retail Sales Post Second Consecutive Month of Contraction

The EUR to GBP exchange rate rallied to an intraday high of 0.8531 after bottoming at 0.8487 on Friday following the disappointing UK retail sales report. By the end of the New York session, the currency pair had settled at 0.8522.

According to the Office for National Statistics, consumer spending contracted by 0.6% in December. It missed forecast which was for an increase of 0.5% as analysts factored in the Tories’ win in the General Elections to have some positive effect. It marked the second consecutive month of contraction. Consequently, it fueled speculations that the BOE may soon feel the need to cut rates.

ECB Rate Statement Due This Week

Today, there are no reports from the UK nor the euro zone. However, the ECB is scheduled to make its rate statement later this week. If the central bank sounds less eager to ease anytime soon, we could see the EUR to GBP exchange rate rise even more.

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EUR to GBP Outlook

On the daily time frame of EURGBP, the currency pair has formed a higher low following its series of lower lows. When you enrol to our forex trading course, you will learn that this is what characterizes an inverse head and shoulders chart pattern. It is widely viewed as a bullish indicator as the most recent low indicates that the momentum has shifted to the buyers. The currency pair looks to be trading above the neckline already. However, its gains are limited by the falling trend line (from connecting the lower highs of August 9 and October 10) as well as the 23.6% Fib level (drawing from the high of August 10 to the low of December 12). A strong bullish candle needs to close above this confluence of resistance at the 0.8600 handle in order for EUR to GBP to rally to its October 10 highs at 0.9000.

On the other hand, reversal candles could indicate that there may be enough sellers left in the market to push EUR to GBP to 0.8273 where it bottomed in December.

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