Image © Adobe Images
Technical considerations are in charge of the Pound to Euro exchange rate (GBP/EUR).
Pound Sterling could be at risk of turning lower against the Euro again in the short term, based on recent technical developments.
GBP/EUR spiked to 1.16 in the wake of UK labour market statistics, only to reverse the majority of the gain and close the day back at 1.1565, putting it close to where it started the day.
The failure to build on initial pulse of strength that followed the UK labour market report signals the underlying frailty of the Pound.
This frailty is etched on the daily chart in the form of an interesting candle pattern, known as a shooting star:
The candlestick is characterised by a small real body near the lower end, an upper shadow that is at least twice the size of the body, and little or no lower shadow.
A shooting star can often signal a potential bearish reversal, i.e. that the Pound-Euro recovery sequence is about to turn lower again.
This would be a technical confirmation of the underlying fundamental frailty in Pound Sterling, particularly against the Euro.
"The Shooting Star pattern is a powerful bearish reversal signal that typically forms after an established uptrend, according to Dukascopy, the Swiss-based trading firm, adding that:
"The pattern works best at key resistance levels or psychological price points, where it signals market rejection."
Context is therefore important: let's contextualise the current GBP/EUR daily chart:
As can be seen, the shooting star is close to a layer of resistance that starts at 1.16.
In fact, Monday's Week Ahead Forecast report was looking for this very behaviour. Our annotations suggested the short-term rally would extend up to 1.1613 and potentially encounter enough resistance to pull back.
Above: Week Ahead Forecast, with annotations drawn on Monday.
Now, these are early days yet, and the GBP/EUR could yet punch through and extend higher.
But our suspicions have been that GBP/EUR upside will stay tepid and the risks are pointed to the downside.
Thursday's GDP data release provides the next calendar test for Sterling, as it should give a view as to how the economy performed in the second quarter.
A below consensus reading risks reinforcing the technical pattern observed on the chart, and follow-through selling interest takes us lower again.