Sterling unexpectedly continued its fall last week, despite not disappointing news and reports for the UK economy. Employment data remained robust, inflation data was much expected and retail sales are somewhat growing. Thus, we investigate the charts looking for any bearish indicators.
The previous week was another negative one for the British currency, that has recently showed some comeback signs under the leadership of Theresa May. Following two weeks of pulling back on the long-term downtrend, Sterling’s exchange rate against the Euro resumed declining, closing at 1.165 on Friday for an 1.3% drop last week.
The least expected reaction of GBP trading happened on Friday, when the rate collapsed from 1.177 despite the lack of news on that particular day for the Pound. This weakness must have been driven by reports predicting another cut of the interest rates in November. Yet, that rumor alone cannot justify such a selling pressure.
Thus, key technical levels should be still valid, such as the support level at 1.15 and the resistance at 1.20, where the recent rally came to a halt.
As previously discussed, the 1.15 price level is a lot more interesting, due to the RSI divergence already taken place in August. While the rate printed a new low, the indicator at the bottom of the chart, called RSI, not only did it not print a new low but it has actually climbed on the same dates. This divergence is also apparent in the weekly chart, which we analyzed last week.
Driven by that fact, I firmly believe there’s some merit in expecting a reversal of the general bearish UK sentiment in the coming weeks. The recent pullback has indeed weakened a lot the previous two weeks admittedly and many will see last week’s fall as a negative sign. While no one can say for sure how GBP/EUR will react when it retests the support level, we cannot ignore strong leading technical patterns, such as divergences.
Surely GBP may head even lower and test 1.10 or possibly 1.05 in the long run. On the other hand, it may just as easily bounce again off 1.15 and retest 1.20. For comparison reasons, when GBP printed a low at 1.16, there was no reason for the Sterling to stop trending south. There was no pattern to hint a reversal or even a slowing down. Nowadays, by taking into account the August-September rally combined with this reversal sign, we should stay put and see how these will play out.
Euro meanwhile, declined from 1.123 to 1.115 against the US dollar in yet another uneventful week.
We’ve been talking for weeks now about the deadlock that the Eurozone’s currency is at for the last months, trading between 1.10 and 1.15. Even Friday’s standout action took place due to improving ecostats coming in for the US economy. At this point, there’s no reason to believe the dull EUR/USD is escaping the range anytime soon, but come the time it does, it will be a spectacle, given for how long it has traded inside those limits.