- EUR/GBP witnessed some selling on Monday, though lacked a strong follow-through.
- The formation of a rectangle might be categorized as a bearish continuation pattern.
- Mixed oscillators on hourly/daily charts warrant some caution for aggressive traders.
The EUR/GBP cross edged lower during the first half of the trading action on Monday and refreshed daily lows, around mid-0.8400s during the early European session.
The United Kingdom hinted at a compromise on the post-Brexit Northern Ireland trade rules. This, in turn, was seen as a key factor behind the British pound's relative outperformance and exerted some pressure on the EUR/GBP cross. The downside, however, remains cushioned amid a modest pickup in demand for the shared currency, which drew some support from a subdued US dollar demand.
Moreover, diminishing odds for an early policy tightening by the Bank of England held traders from placing aggressive bullish bets around the sterling. Investors also seemed reluctant, rather preferred to wait on the sidelines ahead of the European Central Bank meeting on Thursday. This further contributed to limiting any meaningful slide for the EUR/GBP cross, at least for now.
Looking at the technical picture, bulls, so far, have struggled to capitalize on last week's bounce from the lowest level since February 2020. The upside remained capped near the top boundary of a one-week-old trading range, which constitutes the formation of a rectangle. Given the recent sharp decline, the rectangle could still be categorized as a bearish continuation pattern.
Meanwhile, the intraday decline, so far, has shown some resilience below the 200-hour SMA. Moreover, technical indicators on hourly charts have been gaining positive traction, though are yet to recover fully from the bearish territory on the daily chart. This further warrants some caution before placing any aggressive directional bets around the EUR/GBP cross.
From current levels, bulls are likely to wait for a strong follow-through buying beyond the 0.8465-70 region before placing fresh bets. A sustained move beyond should allow the EUR/GBP cross to reclaim the key 0.8500 psychological mark. The recovery momentum could further get extended towards the next relevant hurdle near the 0.8525-20 supply zone en-route mid-0.8500s.
On the flip side, the 0.8420-15 region, or the lower boundary of the mentioned trading band should continue to protect the immediate downside. A convincing break below will be seen as a fresh trigger for bearish traders and turn the EUR/GBP cross vulnerable to break below the 0.8400 mark. The downward trajectory could eventually drag the cross to the 0.8335 support area.
EUR/GBP 1-hour chart
Technical levels to watch
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