EUR/GBP: Brexit breakout could target .8000 or .8100 next
Matt Weller, CFA, CMT February 24, 2016 11:00 AM
<p>At the beginning of the week, w<a href="http://www.forex.com/post?SDN=4bc8a894-e945-4518-9af5-ce49cb121c32&Pa=20db1fa6-e674-420c-9a87-2ee29261d638">e highlighted the massive market uncertainty surrounding the upcoming vote on “Brexit”</a> (UK exit from the European Union), concluding that, <i>“</i><i>While it’s difficult to handicap the near-term price action, we’re inclined to look for more downside in GBP/USD given the ongoing uncertainty and bearish momentum. A close below 1.4080 would likely open the door for a run down to psychological support at 1.40, if not lower.”</i> With the pair hitting a low near 1.3880 this morning, you could argue that even that bearish view was too conservative.</p>
At the beginning of the week, we highlighted the massive market uncertainty surrounding the upcoming vote on "Brexit" (UK exit from the European Union), concluding that, "While it’s difficult to handicap the near-term price action, we’re inclined to look for more downside in GBP/USD given the ongoing uncertainty and bearish momentum. A close below 1.4080 would likely open the door for a run down to psychological support at 1.40, if not lower." With the pair hitting a low near 1.3880 this morning, you could argue that even that bearish view was too conservative.
The impact on the EUR/GBP cross has been nearly as severe. Since forming a long-term base in the .7000-.7500 region throughout 2015, the unit has turned definitively higher thus far this year, tracking the rising uncertainty surrounding Brexit. While no one is definitively sure what a Brexit would mean for the UK and Eurozone economies (after all, it’s never happened before), traders tend to sell first and ask questions later when uncertainty is on the rise.
On a technical basis, EUR/GBP is in the middle of a potentially critical breakout. Rates are peeking out above the 50% Fibonacci retracement of the entire February 2013-July 2015 drop at .7875. Meanwhile, a steep bullish trend line connecting four separate lows (including at the end of last week) has formed and continues to provide strong support. Even the RSI is pointing higher, with the widely-watched indicator holding within a clear bullish range from 55 to 75.
Assuming today’s breakout is maintained with a close above .7875, further gains are favored in EUR/GBP. The next nearby level of resistance is psychological resistance at the .8000 handle, followed by the 61.8% Fibonacci retracement up at .8100. Only a reversal and break below the established bullish trend line (currently near .7775) would invalidate the near-term bullish bias.
For a pair that was constrained to a 500-pip range for most of last year, EUR/GBP volatility has come back with a vengeance so far in 2016.
For more intraday analysis and market updates, follow us on twitter (@MWellerFX and @FOREXcom)
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.