eurgbp potential medium term top below 0 8490 has been formed ahead of boe 1824942016

Today’s Super Thursday main focus on the marketplace will be the Bank of England’s (BOE) monetary policy announcement that will be out later at 1100 GMT.

In the previous meeting on 14 July 2016, BOE has chosen to stand pat and wait for more data to gauge the potential negative spill over effects from Brexit before cutting its benchmark policy interest rate. The EUR/GBP has declined as expected and almost hit our first target/support at 0.8230 (printed a low of 0.8247 on 14 July 2016). Please click here for recap on our previous technical research report on the EUR/GBP.

Since 14 July 2016, a slew of major economic data for July such as manufacturing and services PMIs have come in below expectations that indicate an impending recession for U.K. These latest set of economic data has led the majority of the economists survey by the media outlets to forecast a 25bps cut in the policy interest rate from a record low of 0.5%  Even the interest rate futures market has priced in a 100% probability of a rate cut of 25bps.

Over at the currency futures market based on latest COT (Commitment Of Traders) data as at 26 July 2016, the amount of net shorts position of “Large Speculators” on the GBP has increased to 80,872 contracts which is the highest since the 04 June 2013 figure of 77,738  (close to a 3 year high), refer to the first chart below. Thus in order for the GBP to stage a pronounced decline, BOE needs to stage a surprise by cutting more than 25bps and even increase its quantum of its quantitative easing programme that is currently set at GBP375 billion  

Let us take a look at the EUR/GBP cross from a technical analysis perspective

EUR/GBP

(Click to enlarge charts)

Key elements

• Since the last BOE meeting on 14 July 2016, the EUR/GBP has printed a low of 0.8247 and evolved into a 2-weeks plus ascending range consolidation that stalled below 0.8490 (slightly below the previous pivotal resistance of  0.8512). Interestingly, the 0.8490 resistance level confluences with the previous minor swing low area of 07 July 2016 and a Fibonacci cluster (0.618 Fibonacci retracement from 06 July 2016 high + 1.00 Fibonacci projection from 14 July 2016 low) (see 4 hour chart)
• Based on the Elliot Wave Principal and fractal analysis, the entire ascending range consolidation from 14 July 2016 can be considered as a sub minor countertrend rally wave b structure within a minor degree corrective wave 4/ structure that typically consists of sub minor waves a, b and c). Wave b of 4/ is likely to have ended recently at the 02 August 2016 high of 0.8490 and a bearish break below the lower boundary of the ascending range on 03 August 2016 has reinforced the start of the impulsive downward movement wave c of 4/ with expected end targets set at 0.8230 and 0.8130/0.8068 (see 4 hour chart).
• The aforementioned expected end target of wave c of 4/ at 0.8130/0.8068 also confluences with the significant graphical support zone that is defined by pull-back support of the former long-term descending channel bullish breakout (depicted in dotted brown – see monthly chart) and the pull-back support of a former shorter-term ascending range bullish breakout (depicted in dark blue – see 4 hour chart).
• The lower boundary of the short-term ascending range bearish breakout (depicted in dotted red) is now a pull-back resistance at 0.8400/8415 (see 4 hour chart).
• The 4 hour Stochastic oscillator has exited from the oversold region and still has some room left to manoeuvre to the upside before reaching an extreme overbought level. These observations suggest that the price action of EUR/GBP may see a minor push up first towards the 0.8400/8415 pull-back resistance at this juncture.

Key levels (1 to 3 weeks)

Intermediate resistance: 0.8400/8415

Pivot (key resistance):  0.8490

Supports: 0.8230 & 0.8130/8068

Next resistance: 0.8710/8740

Conclusion

Maintain medium-term bearish bias. The EUR/GBP may see a minor push up first towards the intermediate resistance of 0.8400/8415 with a maximum limit set at the 0.8490 medium-term pivotal resistance before another potential downleg materialises to target 0.8230 follow by the significant support zone of 0.8130/8068.

On the other hand, a clearance above the 0.8490 medium-term pivotal resistance is likely to invalidate the preferred medium-term bearish scenario to see a continuation of the longer-term bullish movement in place since 25 May 2016 low towards significant resistance zone of 0.8710/8740.

Charts are from eSignal  & TimingCharts.com

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