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After testing a Fibonacci level at .7783 in July, the EUR/GBP may have reached a bottom at .7754, but the inside move during August is still not enough to confirm it. This pattern typically indicates impending volatility.
Based on the main range from the January 2007 bottom at .6535 and the December 2008 top at .9803, a major retracement zone was formed at .8169 to .7783. The Euro/British Pound is currently testing this zone. The more time this currency pair spends inside of this retracement zone, the more likely that accumulation is taking place.
If support is established inside of this 50 to 61.8 percent zone, then short-covering or fresh buying may trigger a break through the well-established downtrending Gann angle at .7963 this month. The first move through this resistance line is likely to send the market into the 50% level at .8169 initially, but upside momentum is likely to begin once this price level is cleared.
Comments from European Central Bank President Mario Draghi may have stopped the decline near the Fibonacci level. In late July, Draghi pledged to support the Euro. This triggered a strong up move in the single-currency with the strongest move occurring against the U.S. Dollar. His statement may have stabilized the Euro against the British Pound, but this currency pair has not seen the same upside strength as the EUR/USD. However, the inside move in August is a sign that this volatile up move may be coming.
Fundamentally, the Euro is stabilizing because investors are starting to believe that perhaps the European Central Bank’s new plan to buy Spanish and Italian bonds may actually help to hold down interest rates. Since Draghi made his comment in late July, interest rates in these two countries have been slowly declining, giving monetary policy decisions made by the ECB a chance to work.
While the focus in Europe has been on the sovereign debt crisis and tackling the issue of rising debt rates, slowing economic conditions continue to dominate the U.K. The combination of a risky economic situation in Europe and the implementation of severe austerity measures by the British government continue to weaken the U.K. economy.
Early this month, the ECB is expected to announce new ways to stabilize interest rates. This is widely expected to be the implementation of another round of Spanish and Italian bond purchases. This should help to support the Euro. At the same time, the Bank of England could also execute additional bond purchases. This could weaken the currency. With the ECB’s action expected to strengthen the Euro and the BOE’s move expected to pressure the Sterling, we may see a breakout to the upside in the EUR/GBP.