False Breakout Kills the Demand on the EURGBP

EUR was heavily influenced last week as we had the ECB decision along with the press conference. The final outcome of this was rather hawkish (or less dovish as some people may say) and the EURUSD climbed significantly higher. When we look at the other currencies we can have the feeling that this movement was rather largely contributed to the weaker USD rather than stronger EUR itself as many other pairs with the EUR on front failed to climb higher.

Our today’s example is the EURGBP, where the ECB movement allowed to break the upper line of the wedge but the appreciation was quickly stopped and finally resulted in the creation of the false breakout pattern (yellow).

Let’s start from the very beginning. The pair is still in a long-term up trend. Ahead of the ECB, we had a small bearish correction here (wedge, orange lines), which generally should result in an upswing. That is precisely what happened but the thing is that the positive sentiment was quickly erased and on Friday, the price reversed sharply and went back to the wedge again.

We repeat that very often and constantly get plenty examples of that – false breakouts usually result in the strong movements in the opposite direction. No other way here as well. After that fake rise on Thursday, the price is now falling rapidly.

The closest target for this drop is not so far away. It is a support created by the combination of the up trendline (black) and the 23,6% Fibonacci. That can be a good place for an upswing, especially that we just made the correction of the same length as this one seen in the middle of July (grey area). It is definitely too early to state that we will have a bounce here but that is a potentially a nice place to do so. The thing is, that buy signal will be justified only after we will be able to see a demand here, so, for example, a hammer or a bullish engulfing candlestick pattern.

This article is written by Tomasz Wisniewski, a senior analyst at Alpari Research & Analysis