EUR/GBP continues head-and-shoulders slide towards downside target
James Chen, CMT May 25, 2016 5:30 PM
EUR/GBP continued its sharp slide on Wednesday morning for the second consecutive day this week as the euro has generally remained in a prolonged slump and sterling has once again taken center stage as the star performer against other major currencies. In the process of this slide, the currency pair hit a new 16-week low under 0.7600 early on Wednesday.
Having dropped to this low, EUR/GBP has also hit key support at its 200-day moving average as well as the 50% retracement of the previous uptrend from the 0.7000-area lows of last November up to the multi-year high of 0.8115 that was reached early last month.
Since that high, the currency pair has been falling precipitously at times, finally breaking down below the 0.7750-area neckline of a clear head-and-shoulders pattern just a week ago. Although price subsequently rallied back up to retest the neckline, the past two days has seen a steep plunge as the pound has surged strongly. Head-and-shoulders patterns are typically considered major potential reversal patterns as they represent multiple failed attempts to continue the previous uptrend. The "neckline" of the head-and-shoulders formation connects the lows of the pattern, and a breakdown below the neckline is often taken as a bearish signal and potential reversal.
As with most technical chart patterns, the head-and-shoulders incorporates a price target. This target is derived by measuring the vertical distance from the top of the "head" to the neckline, and then projecting that distance down from the breakdown point of the neckline. In the case of the current pattern, this measured target falls just around the 0.7350 support level.
Having just reached down to touch the noted support at the 200-day moving average and 50% retracement, however, EUR/GBP has hit a critical technical juncture. Any strong breakdown below this support would confirm the pattern and could lead to a continued drop towards its 0.7350 target.
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