EUR/GBP On the Upwards March

Wednesday, 15 September 2010

If there has been one currency which has surprised us the most in the last few weeks – t's been the Euro. Since it suffered a massive loss against almost all of its partner currencies at the beginning of the year, it seems that the EUR has been making a comeback over the second and third quarters.

This is obviously most obvious on the daily and weekly charts, however we have recently been looking at the EUR/GBP 4 hourly chart, and we believe that the pattern is clear here also.

Essentially, what we are seeing is a potential double top forming on the currency pair. About 3 days ago (at the start of the week) the currency pair topped out at around 0.8390 before plummeting back towards an ascending trend line.

In the last 23 hours, the currency pair has once again approached this level, and therefore we are looking to see whether or not the currency pair breaks through that level.

There are essentially two scenarios which could play out here:

1. The currency pair breaks the resistance band and progresses higher
2. A double top forms and the currency pair heads lower

In the first scenario, the currency pair will again approach the resistance line high as it did at the beginning of the week. However, instead of bouncing off the level, the pair will bust through it and progress higher. At this stage, we are unsure of a target for the currency pair – however it would be a reasonable estimate to predict 50 to 100 pips in profit if you were to enter a trade immediately above the resistance line.

The second scenario we believe is the more common / expected of the two. The Euro has certainly shown strength lately, however we believe that as debt issues creep back on to the scene, the EUR/GBP might not progress as high as many people first thought.

Hence, we favour a bounce off the resistance band and a return to at least the midpoint of the upper resistance band and the lower ascending trend line.

There is of course a third option – and that is a false break through the upper resistance band. We think at this stage that is unlikely; however we are open to changing that view if the fundamentals of the market change significantly in the coming hours and days ahead.

For now – we are placing a sell order slightly under the top resistance line, with a stop loss order above the line and a limit (profit) order conditional upon the sell order taking place – at around the midpoint of the two lines we have been discussing (which is at approximately .8281.