- EUR/GBP makes a modest recovery after an initial drop to new yearly lows.
- Rectangle formation could be seen as a bearish consolidation phase.
- A move beyond 0.8460 resistance required to negate the downside bias.
The EUR/GBP pair has reversed an initial decline to new yearly lows and trades with modest gains on the day around the 0.8430-35 region.
Sterling’s relative underperformance
Sterling’s relative underperformance during the first half of the European session caused by profit-taking in the GBP/USD pair amid an increase in U.S. dollar demand. Furthermore, the expectation of an imminent rate hike by the Bank of England later this year should act as a tailwind for sterling. And furthermore limit gains for the EUR/GBP pair.
Looking at the technical picture. The recent rangebound price action witnessed since early this week constitutes the formation of a rectangle on short-term charts.
Additionally, the upper boundary of the aforementioned trading range, around the 0.8460 region, now coincides with the 200-hour SMA. This should now act as a pivotal point for short-term traders. In the absence of a relevant fundamental catalyst, a sustained move above this region will suggest the EUR/GBP pair has bottomed in the near-term, which will trigger an aggressive short-covering move.
The EUR/GBP pair could aim to regain the key psychological level of 0.8500. The recovery momentum could extend further towards the 0.8525-20 resistance zone, the next important hurdle. The pair will rise to the 0.8550 region on the way to 0.8575-80 zone. With some continuation buying in the near-term.
In contrast, the 0.8420-15 region, or the lower boundary of the weekly trading range, now seems to be acting as strong immediate support. Before opening new bearish positions, traders should wait for sustained weakness below the aforementioned support. EUR/GBP could become vulnerable if it breaks below the round 0.8400 level and slides to the 0.8335 support zone.