EUR GBP surges as euro rises on Draghi and pound extends plunge

EUR/GBP (daily chart shown below) rose well above the 0.7300 handle on Wednesday as the euro was boosted by comments from ECB President Mario Draghi that were less dovish than expected. At the same time, the pound extended its dramatic plunge for the second consecutive day, with the GBP/USD closely approaching its 1.5200 downside support target.

For EUR/GBP, this combination of a moderately stronger euro and a severely weaker pound prompted the currency pair to rise sharply to a degree that has not been seen for nearly a month, since late August.

This rise has propelled EUR/GBP to the upper border of a short-term descending channel, which can also be seen as a potential flag pattern. Flag chart formations are price consolidations that are most often considered trend continuation patterns because they frequently serve to extend the trend that immediately preceded the pattern. In the current case, that preceding trend was sharply to the upside. A sustained breakout above the flag consolidation would confirm the pattern.

As this price action unfolds, the sharply rising 50-day moving average has also begun to converge closely with the 200-day moving average. If an impending cross of these two moving averages occurs, it would form a technical pattern called the “golden cross,” which would provide a strong bullish signal for the currency pair. These two moving averages have not crossed for over two years – since September of 2013 – when a downside cross, or “death cross,” signaled the early stages of a new downtrend.

The 200-day moving average has also been running alongside the approximate bottom of the flag consolidation, providing additional support for the pattern.

In the event of a subsequent breakout above the current flag pattern, the next major resistance target immediately to the upside is at the 0.7450 level. Further to the upside, 0.7600 is the next key resistance objective on any sustained breakout above 0.7450.