Intriguing EUR/GBP Scenario Unfolding
Chandan Gupta
2024-04-08EUR/GBP exhibits a monthly Head and Shoulders Top pattern alongside a daily inverted Head and Shoulders Top formation, indicating potential trend reversals on different timeframes.
Technically speaking, price action on the EUR/GBP cross has been rangebound since late 2016, which is evident on the monthly chart.
However, what this ranging action has offered technical eyes is a potential Head and Shoulder’s Top pattern to work with between £0.9306, £0.9504 and £0.9066 (if you wanted to be more technical, you might also refer to this as a complex Head and Shoulder’s Top given the two left shoulders). The pattern, as you can see, has yet to be completed as the right shoulder is still forming, but a neckline has been drawn in anticipation of pattern completion, extended from the low of £0.8313.
Nevertheless, drilling down to the lower timeframes on the daily chart, you will note that price action is in the process of chalking up an inverted Head and Shoulder’s Top pattern between £0.8513, £0.8498 and £0.8528, with a neckline drawn from the high of £0.8572.
What Does This Mean?
Should the daily chart’s pattern complete—rupture the neckline—this could see a moderate move to the upside. However, knowing that there is a possibility of the monthly timeframe eventually targeting a break of the Head and Shoulder’s Top pattern’s neckline, any upside move could be weakened on the daily timeframe.
The ECB kept borrowing costs at record highs on Thursday, but took a first, small step towards lowering them, saying inflation was easing faster than it anticipated only a few months ago.
Markets latched onto that, with traders pricing in 100 bps worth of rate cuts this year, versus 90 bps before the decision.
June is still seen as the most likely start date for ECB easing, market pricing suggested.
While the Bank of England is one to watch. It's currently expected to ease rates later than the Fed and the ECB, but some investors reckon a weaker growth outlook could prompt an early move, while others note the BoE could deliver larger rate cuts overall.
UK rates are at nearly 16-year highs and the BoE has softened its stance about when it might cut them, while one of its policymakers cast the first vote for a reduction in borrowing costs since 2020. Traders anticipate a first cut in August, having pushed that back from June at the start of 2024.
Resistance on the Daily Timeframe?
Assuming we do indeed witness a breakout higher on the daily timeframe and price tests the projected inverted Head and Shoulder’s Top pattern’s profit objective at £0.8658, this, combined with the resistance zone located above it between £0.8671 and £0.8664, could be an area where the chart welcomes a sell-on-rally scenario based on what is being shown on the monthly timeframe.
