EUR/GBP Monthly Analysis for December 2, 2012

A late month surge in the Euro helped the single-currency recover nicely against the British Pound during November. The strong close has the EUR/GBP in a position to breakout to the upside once it takes out two key technical points. 

Based on the long-term range of .6535 to .9803, a key retracement zone has been established at .8169 and .7783. Last month’s close is currently breathing on the upper end of this zone as well as the October high at .8164. A breakout through .8164 and .8169 is likely to trigger a sharp rally to the upside.

 Last month, the market tested successfully an uptrending Gann angle at .7954 this month. It is also following another Gann angle at .8154.  If the market does breakout to the upside then regaining this angle will be a sign of strength. Because the market has been holding in a range, a breakout is likely to fuel a volatile move with .8403 the next likely target. 

The short-term range is .7754 to .8164. The mid-point or pivot price of this range is .7959. This price is controlling the short-term direction of the market. Holding above it puts a bullish spin on the EUR/GBP. A break through it will be a sign of weakness. 

Fundamentally, traders are focused on the U.S. “fiscal cliff”. If U.S. officials reach an agreement then the Euro is likely to soar. While the British Pond may rally against the dollar, the Euro should outperform the Sterling. This is because the U.K. economy is still showing signs of weakness. Investors have been reluctant to buy the British Pound because of the possibility of another recession during the fourth quarter and because the Bank of England may resume its quantitative easing program. 

Besides greater demand for higher risk assets, the Euro may gain strength if Greece gets its bailout money in a timely manner and if Spain makes a formal request for funds.