Sterling has dominated the euro for most of the last two years and that accelerated between January and March this year, after which we started to see some consolidation.
The question that arose following this is whether the consolidation is a bottoming out in the pair or just a breather before the next leg lower, with the move at the start of the year being one final heave.
As is stands, it’s difficult to say as the consolidation pattern that has emerged is a flag – typically a continuation pattern. However, until we see a breakout, it’s difficult to say for sure. On Wednesday it looked as though we had seen a break lower in the pair early in the session but it did recover shortly after and end the day much higher.
Moreover, the neckline of the double bottom that formed during that move was broken and has since been retested and confirmed. Based on the size of the double bottom, this could now prompt a move back towards 0.7320 – a previous area of support and resistance, most recently on 5 and 8 May. This would suggest that the consolidation will continue for now and any break to the downside delayed, at the very least.
Should this be broken, 0.7420 is the next clear area of resistance having been a key level in the past. This level also marks the point at which the bottom of the channel that the pair traded within between August 2013 and January this year, re-enters the fray.
This level will be very key and a break above would be a very bullish signal in my view as it would signify a significant weakening of what only recently became a stronger downtrend.
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