The British pound weakened significantly against its major trading partners after Britain’s inflation rate surprisingly turned back into negative territory in September. The Office for National Statistics announced CPI plummeted to -0.1, a record level low that was last seen in April. Price inflation was led lower by falling oil and clothing prices. This report is likely to push back expectations for the Bank of England to raise interest rates.
Price action on the EUR/GBP daily chart has risen to a 5-month high after finally breaking out above the .7441 resistance level. The bullish stance is firmly in place as price is trading above the 200-, 100-, and 50-day SMA(s). The next key resistance level may be the psychological .7500 handle. Further upside may ultimately target the .7550 zone. It is around that area that we may see a bearish butterfly pattern form. Point D of the reversal pattern is targeted with the 161.8% Fibonacci expansion level of the X to A leg and the 200.0% Fibonacci expansion level of the B to C move. If valid, we could see profit taking occur around that area and lead a reversal back towards the .7400 region. If the pattern is invalidated and bullish momentum continues, we could see price rally towards the .7750 level.
In the event we see a major reversal with the euro, major support will come from the 200-day SMA, which currently trades around the .7270 level.
The Trade: Buy EURGBP at .7445 with a stop loss at .7395, and a take profit at .7545. The Risk/Reward ratio is 1:2.
Edward J. Moya is the Chief Market Strategist for edmoya.com, an educational website for foreign exchange and commodity traders. He has over 15 years of investment industry experience in forex, stocks, options and futures. At edmoya.com, Mr. Moya writes daily currency and commodity analysis and has authored numerous articles on trading using both technical and fundamental analysis for major financial publications. He is a contributor of technical and fundamental analysis in currencies and commodities to SFO, Market News International, and Forex Factory.
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