ecb interest rate decision day eurgbp at 0 77757800 inflection zone potential short term downside re

The European Central Bank (ECB)will announce its latest monetary policy decision later today at 11145GMT follow by a press conference at 1230GMT. The consensus is no changes in the key benchmark interest rates (Refinancing @0%, Deposit @-0.4% & Marginal Lending @0.25%) and no additional monetary stimulus.

The full effects of the last easing measures announced in March have not yet materialise with corporate bonds purchases only to commence this month and further TLTRO allotments which suggests that ECB is likely to adopt a “wait and see approach” before announcing any new measures.

In addition, the recent recovery seen in energy (crude oil) prices may be used by ECB as a reason to be more optimistic on Eurozone economic outlook as the risk of deflation diminishes. All these expectations have led to a recent recovery seen in EUR/USD from 30 May 2016 low of 1.1097 and other EUR crosses. However from a technical analysis perspective, elements are getting interesting in some of the crosses especially the EUR/GBP cross pair where another theme play is also developing from the risk of “Brexit”.

Let us take a look at the potential short-term movement on the EUR/GBP from a technical analysis perspective.

(Click to enlarge charts)

Key elements

• The recent EUR/GBP’s rally from the 31 May 2016 low of 0.7571 is now right below the neckline resistance of the “Head & Shoulders” bearish breakout at 0.7800.
• The 0.7800 neckline resistance also confluences with a Fibonacci cluster and the upper boundary of the bearish descending channel in place since 07 April 2016 high.
• The recent upside momentum of price action has appeared exhausted as the daily Stochastic oscillator is now at its extreme overbought level coupled with a prior bearish divergence signal seen in the shorter-term RSI oscillator that has just exited from its overbought region.
• Current price action is now testing a short-term steep ascending trendline support drawn from the 31 May 2016 low that also coincides closely with the minor swing high area of 23/24 May 2016 at 0.7750.
• The next significant short-term support rests at 0.7655/7640 which is defined by a former minor swing high congestion zone from 25 May to 27 May 2016 and 61.8% Fibonacci retracement of the recent steep rally from 31 May 2016 low to the current intraday high of 0.7775.

Key levels (1 to 3 days)

Intermediate resistance: 0.7775

Pivot (key resistance): 0.7800

Supports: 0.7750 & 0.7655/7640

Next resistance: 0.7930 (swing highs of the left & right shoulders)

Conclusion

The recent rally seen in the EUR/GBP cross pair is now at a tipping point below the 0.7800 pivotal resistance where technical elements are advocating for a short-term potential downside reversal. A break below the intermediate support at 0.7750 is likely to add impetus for a further slide to target the next support at 0.7655/7640.

On the other hand, a clearance above the 0.7800 pivotal resistance is likely to negate the expected bearish scenario for a further squeeze up towards the next resistance at 0.7930.

Charts are from eSignal

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