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Will traders keep selling EURGBP rallies?

A controlled consolidation or range is great for mean reversion trading. False breakouts can trap those early trend followers and a grind lower on EURGBP looks more likely as sentiment is extreme on the ActivTrader sentiment indicator.

EURGBP Analysis

The long-term trend for the EURGBP is neutral. The currency pair is consolidating below the 200 ema and 20 ema and is capped by the upper bounds of a tight descending channel.

The short-term trend is clearly to the downside and any test towards the H4 200-period ema when confluent with an overbought signal on the stochastic indicator (10,3,3) is showing a decent set up for the next leg down. The trigger should you wish to use this as part of a trend following strategy would be a bearish close below the 20-period ema. Targets would be initially for the previous swing low and risk would be the swing high prior to the trigger signal.

Looking at the daily chart, a test of the lower end of the long-term trading range and horizontal support around 0.8275 should be expected, if prices are moving below the 20,50 and 200 ema's.

As mentioned before selling EURGBP rallies is currently the trade to take but if trader sentiment wins out and EURGBP gets higher than a significant daily swing high, we must be mindful that these down-trending channels tend to break to the upside and can do so with an explosive move.

The ECB still thinks fiscal support will be better than monetary policy going forward as the central bank has come to the limit of what they can do to get Europe out of the current economic conditions. Today’s Bank of England decisions may show that the nimbler UK can get the jump on our neighbor and set a more Hawkish tone for the UK monetary policy. So far, the UK government has also been willing to do whatever it takes to get the UK out of the coronavirus disruptions and schemes like furlough have been extended as well as fiscal support across other areas of the economy.

Currently, the ECB has set European rates at 0.00% and the BOE has the UK rates at 0.10%. Rate differentials between the UK and Europe will be supportive of the pound against the single currency and a test towards 0.8400 is in my opinion more likely than a move towards the daily 200 ema at 0.8730.

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