EUR GBP Will 7150 support withstand the bearish tsunami

By far the biggest FX development over the two weeks was ECB President Draghi’s unexpectedly dovish press conference, which hinted heavily at a likely expansion of the central bank’s quantitative easing (QE) program come December (see “ECB Recap: Draghi fulfills dovish fantasies, EUR/USD breaks 1.12” for more). The reverberations of this seismic shift are still echoing around the global markets, but the ongoing euro weakness appears to a theme that’s here to stay.

Taking a look at EUR/GBP, the pair has tumbled from resistance up near .7500 all the way back to the middle of the 9-month consolidation zone around .7200 as of writing. The failed breakout two weeks ago, which was foreshadowed by a triple bearish divergence in the RSI indicator (see the chart below), marks at least a medium-term top, and after a brief attempt to rally early this week, EUR/GBP put in a big Bearish Engulfing Candle* pattern yesterday. For the uninitiated, this candlestick pattern shows a shift from buying to selling pressure and hints at more downside to come as we move into November.

On the other hand, there are some signs that buyers may step in to defend the pair, at least in the short-term. Crucially, the pair is testing the 61.8% Fibonacci retracement of the July-October rally at .7150. Therefore, traders who missed the big drop over the last three weeks may want to stay on the sidelines for now and wait to fade a potential counter-trend bounce toward .7250 or .7300. If the bearish tsunami is able to overcome support at .7150 though, a continuation toward the 78.6% Fibonacci retracement at .7050 would be more likely, especially with the RSI not yet in overbought territory.

*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.