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EUR/GBP hits fresh 7-year low

Last Wednesday we put out a report on the EUR/GBP, highlighting a potentially bearish scenario after economic data from the UK outmatched the Eurozone.  In addition to the data, we mentioned that an eventual rate hike from the Bank of England may come well before the European Central Bank starts tightening its policy. On that basis, we argued, that the long-term direction for the EUR/GBP is likely to remain to the downside. While we still hold that view, the Bank of England’s Inflation Report tomorrow and the situation regarding Greece may create some uncertainty about the near-term trend. Stay tuned on for my colleague Kathleen Brooks’ preview of the Inflation Report later on today.

As it turned out, the EUR/GBP did in fact bleed lower after it broke below its short-term corrective trend (see the updated 2-hour chart, below). Since last Wednesday, the cross has broken a number of support levels, including 0.7495, 0.7450 and now 0.7410. Consequently it has dropped to its lowest level since January 2008, potentially paving the way for a move towards the Fibonacci extension levels at 0.7350/5 (127.2%) and 0.7285/90 (161.8%). The short-term bearish trend would weaken on a potential rally above resistance at 0.7450.

Meanwhile as a result of the recent sell-off, the EUR/GBP has also turned lower on the month, potentially resuming its longer term downward trend (see the monthly chart).  Significantly, the long-term broken trend line on the EUR/GBP has now turned into resistance and so the path of least resistance is clearly to the downside on this timeframe too. This longer term bearish view will remain valid for as long as the EUR/GBP holds below the key resistance level of 0.7770. The next long-term support level to watch is around 0.7255. Not only does this correspond with the 61.8% Fibonacci retracement level of the long-term upswing but it was also formerly resistance. Thus it could provide some short-term support, should we get there. Below that is the psychological 0.70 handle.   

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