As we noted in our feature article from last Wednesday, the EUR/GBP is a currency pair with a well-earned reputation for consolidating the majority of the time. However, when it breaks out, it tends to move quickly to the next level of support or resistance. Today’s price action indicates that we may be in the middle of such a move. The daily chart below reveals that rates have finally broken above significant previous resistance at .8400. The developing Bullish Marubozu candle* shows strong momentum on the breakout and suggests that the rally is likely to continue up to the next level of resistance. In this case, previous support at .8500 is the level bulls will look to target next.
A quick look at the 4hr chart confirms the significance of the 84.00 resistance level. The chart below shows that the .8400 resistance area converges with the Monthly R1 pivot at .8397 and that this area has provided resistance on at least six occasions already this month. A break above such a significant resistance level means that subsequent pullbacks are likely to find a floor near this area. Further bolstering the bullish case, the clear rising trend line increases the odds of the rally reaching the Monthly R2 pivot at .8497. While buying at current market prices would not offer a particularly favorable risk/reward ratio with logical profit target and stop levels, waiting for a pullback could present a strong buying opportunity in the next 24 hours.
Specifically, traders could set a limit buy order at .8420 (above previous-resistance-turned-support at .8400 and the bullish trend line) with a stop at .8375 (under today’s low) and a target at .8492 (just below the Monthly R2 pivot and anticipated resistance at .8500. This trade would be invalidated by a rally up to .8492 prior to entry or if not triggered in the next 24 hours.
Potential Strategy: Buy if EUR/GBP pulls back to .8420, stop at .8375, target at .8492.
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* A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.
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