EUR GBP poised for potential pattern breakout

After reaching the top of a large pennant pattern late last week, EUR/GBP has since maintained its height near the top of the pattern, and could be poised for an impending breakout to the upside. Pennant chart formations are price consolidations that are most often considered trend continuation patterns because they frequently serve to extend the trend that immediately preceded the pattern. In the current case, that preceding trend was sharply to the upside.

After hitting a multi-year low of 0.6935 in July, EUR/GBP has been on a choppy path of recovery as the euro has shown some solid gains while the pound has displayed mostly stagnation and decline during the past two months.

The currency pair showed the greatest gains recently in mid-to-late August, when the euro briefly surged above 1.1700 against the US dollar. During that five-day period, the EUR/GBP managed to break out above a key downtrend line extending back to last December, both the 50-day and 200-day moving averages, and the 0.7235 resistance area, ultimately reaching more than a three-month high of 0.7420 in late August.

After the pair rose and then pulled back to form the current pennant pattern, both that 0.7235 level and the 200-day moving average have been running alongside the approximate bottom of the pennant, providing additional support for the pattern. Also providing support for the pattern is the 38.2% Fibonacci retracement level of the bullish run from the noted July low of 0.6935 up to the noted August high of 0.7420.

With the 50-day moving average having risen steadily and pointed to the upside for nearly a month, the technical bias has tentatively switched to the upside recently, as the currency pair had previously been significantly oversold.

In the event of any breakout above the current pennant pattern, the next major resistance target immediately to the upside is at the 0.7450 level. Further to the upside, 0.7600 is the next key resistance objective on any sustained breakout above 0.7450. Strong downside support continues to hold at the noted 0.7235 level, the approximate lower border of the pennant pattern.

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