The European Central Bank (ECB) lowered its deposit rate this month by 10 basis points to -0.3%, moving rates further into negative territory. Additionally, the ECB extended its current quantitative easing (QE) program well into 2017 while maintaining the amount of bonds purchased each month. The ECB wants to support Europe for as long as possible. They need to. While these changes in policy constitutes huge monetary action by the ECB, the market was expecting an increase in QE not just an extension and slight adjustments of the same program. The market also anticipated a larger interest rate cut than 10 basis points. This was less aggressive easing than the market was actually expecting. For this reason, the euro continues to rally tremendously (Volume 41). Despite the strong rally that gripped the $EURGBP in the aftermath of the ECB monetary policy easing, there had been no real follow through in either direction for the past two weeks. Dips were met with buyers while sellers capped rallies. Consolidation below the 0.7250 resistance level was not necessarily bearish price action. Despite breaking above the 0.7250 resistance level, the $EURGBP was unable to close above it until the Friday close last week. Additionally, the Friday close remains above the key 0.7100 level (Volume 22) and is a higher close than the previous close on the weekly chart. As such, the $EURGBP maintains its bullish bias for the new trading week.
The $EURGBP has to move below the 0.7200 support and psychological level in order to change the bullish momentum. Last week, sellers continued to step in at and above the 0.7250 level. However, the lows were also met with its own supply. Buyers have been stepping in at the lows above the 0.7200 level. After the volatile surge higher, two weeks of consolidation does not signal a reversal. In fact, consolidating at the highs actually signals a move higher, depending on how the new week opens (Volume 42). As the new trading week opens, this nascent bullish signal has manifested as the $EURGBP has finally moved higher to break above the 0.7300 resistance level that had capped rallies for the past two weeks. This explosive move higher will likely be met with profit-taking after the long consolidation. Pullbacks off the highs need to find support above the 0.7300, now turned, support level. Given price action during consolidation, it is highly likely that it will.
Premium trade setups with targets and stops are published in the $EURGBP Outlook for the Week in Volume 43, this week’s Quid Report.