As Britain’s PM, Theresa May, set Brexit deadline on Sunday and told she would formally trigger the EU exit by March next year, Sterling is likely to have a dreadful start on Monday. Given the turning point that the GBP/EUR is trading at nowadays, this talk may have quite significant short term implications for the currency pair. The downtrend will swiftly resume should a break below the support level occurs, for instance.
GBP/EUR almost didn’t move last week, closing on Friday at the same price as Monday’s open (1.154) with miniscule volatility printing a top at 1.164 and a bottom at 1.147.
That low seems like a matter of life and death for the British Pound now.
In mid-August the GBP’s fall paused at that low for the first time in 2016. That low, though, printed an RSI divergence in the charts, which in technical terms usually sets up a reversal for the most part. In the 20 days that followed the Sterling’s exchange rate against the Euro retraced up to 1.20, testing July’s resistance level. Eventually, the downtrend resumed in September but found again support at exactly the same level the previous week!
What’s more, the RSI indicator shown on the bottom of the chart continues climbing, confirming the divergence once again!
Thus, traders, whose decisions are based on technical analysis, will not only have a divergence to depend on but a double bottom as well! That strong combination of the two technical patterns further support the belief for a possible reversal.
Yet, May’s talk might have just thrown away all the technical stuff out of the window.
Given the importance of the support level, a breakout will surely be considered a very strong one. If there was no divergence or a double bottom formation, a new yearly low wouldn’t come as a surprise. However, according to the analysis above, a new low – should that take place this week – will only accelerate the bearish trend and kill any hopes for a full reversal in 2016.
So let me share some thoughts on that scenario.
In my latest analysis, I discussed extensively about the significance of the 1.14 price area. New Brexit talks may easily convince investors now to sell and push the exchange rate lower than 1.146, which stands for this year’s low. This new downtrend may be short-lived, though and GBP/EUR may bounce off on 1.14. What then?
At that point the RSI divergence should have failed. The double bottom formation will have already be a thing of the past. Having said that, the support level will solely be based on the 2013 lows. While important, there won’t be many other signs indicating a reversal. So, GBP/EUR may just as well be heading towards 1.10 in the next months in that case, which will collapse itself in March, if UK triggers the Article 50!
In the meantime, Euro had another quiet week against the US dollar gaining just barely last week, closing at 1.1234. All eyes will be on the Pound this week and how it reacts on Brexit talks. I suppose it won’t look pretty!