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EUR/GBP: From one extreme to another

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At the start of the week, the pair was threatening a move towards the year’s low


How quickly the tides have turned. Two days ago we were talking about how the pair is testing a break of key support levels. But as mentioned then, the downside move looked to be hitting more of a floor rather than a continued break lower and the Brexit saga overnight exacerbated declines in the pound and that led to a massive one-day jump in EUR/GBP.
The spike higher yesterday saw the pair test the 100-day MA (red line) and break above the 200-day MA (blue line), thus eliminating the bearish bias. Buyers will now be looking to break above the 100-day MA later today and to sustain a bullish bias in order to extend the upside move towards the 38.2 retracement level @ 0.8928 — which stalled the 30-31 October highs.
With the pound’s struggles not likely to go away any time soon, a technical break above the 100-day MA would bode well for the euro in the near-term. But headline risks are ones that are hard to predict and more so when it comes to politics and something like Brexit.
A more positive spin — although unlikely — on May’s Brexit deal ahead of the parliament vote next month will see the pound recover strongly and that’s the real risk for EUR/GBP buyers right now.
The other point to argue is the attractiveness of the trade. Two days ago, we were at the lower extreme of things and the risk-reward was much more favourable to buyers considering the Brexit backdrop.
Right now, we’re at the upper extreme as price is near key resistance levels: 100-day MA @ 0.8881, 38.2 retracement level @ 0.8928, March and July swing highs @ 0.8950-68. And then beyond that there’s also the key psychological level @ 0.9000.
While the pound is still expected to struggle, it may prove tough for buyers to find relatively strong conviction to break above those levels in a swift move unless something bigger than Raab’s resignation rocks the boat.
For me, the only thing that could potentially threaten such a move is May losing her job as prime minister with the threat of a leadership challenge looking imminent. Other than that, I still expect the pound to stay weak as May faces a monumental — if not, impossible — task to get parliament to pass a meaningful vote but dare I say, it will be a much slower bleed than yesterday’s nosedive.

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