EUR/GBP arrives at key support ahead of ECB

The single currency’s bullish days could be numbered in the event the ECB refuses to announce a plan to taper its QE programme tomorrow. In contrast, if the central bank turns hawkish then we could see some further strength in the euro.

The US dollar’s recovery attempt since last week has been futile.  Thanks to poor economic data, Fed officials’ dovish comments and fears over the economic impact of the hurricane, not many people are willing to stand in the way of the dollar’s spectacular slump since the turn of the year. But the focus is now turning to the euro. The single currency’s bullish days could be numbered in the event the ECB refuses to announce a plan to taper its QE programme tomorrow. In contrast, if the central bank turns hawkish then we could see some further strength in the euro. Judging by the “ECB sources” headlines that have been hitting the wires over the past couple of days, the central bank may delay its decision on QE until its next meeting in October. If so, the euro could fall, pushing European stocks higher. Read our full ECB preview HERE.

If the euro falls tomorrow on inaction form the ECB, then EUR/GBP could be the one to watch given the pound’s renewed strength over the past couple of days. For now, the EUR/GBP’s rally appears to have stalled. It formed a doji candlestick pattern after an extended bullish run, on Tuesday of last week. Price has since held below that doji candle, which is characteristic of bearish price action. What’s more, broken support levels such as 0.9235 and 0.9163/5 have turned into resistance. And while the moving averages may be in bullish order, price has moved significantly above the 200-day average, which increases odds for a reversion to mean.

That being said, none of the key support levels have broken down yet. The most important support in my view is around 0.9110-0.9140, which was being tested at the time of this writing. This was formerly a significant resistance zone and where we have the 21-day exponential moving average coming into play. If this support area gives way then we may see a more significant drop. Until and unless that happens, one has to treat this as a normal pullback in what still is a bullish trend. Indeed, any move back above that doji candle’s low of 0.9250 would invalidate the short-term bearish bias.

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