The EUR/GBP pair initially fell on Friday, but as you can see by the daily chart the market bounced. This is especially interesting to me at this point because the Pound is doing so well in general. The fact that the Euro can continue to show a bit of resolve against the Pound suggests that the Euro is ready to continue its march higher.
However, the fundamentals will come into play sooner or later, and the Pound will rise in value over the Euro. Because of this, I have two different outlooks for this pair: The short-term and the long-term. The short-term is positive, but I still think in the long run we will fall.
The Euro seems to have found support at the 0.80 level, which is of course a natural place to find it. The large round number aspect of this cannot be ignored, and the fact that this was once an area of resistance will certainly have to be factored into it as well. The hammer that was formed is perfectly shaped, so this pair has just about everything that I ask out of a market to form a long position.
Europe is in recession
The European Union is in recession, and certainly the Europeans will be buying bonds from each other in the future. This is essentially like printing Euros out of thin air, (Hello Federal Reserve) and as a result it should bring the value of the Euro down. Contrast this with the fact that the Bank of England seems quite content with current monetary policy, and you have the recipe for the Pound to rise, and the Euro to fall – which of course means a lower rate in this market eventually.
I see the 0.81 level above as resistance, and I think we are ready to bounce around in this one hundred pip zone for the short-term. The Euro is getting a bit of a reprieve across the markets simply because it looks as if the European are making progress in the debt crisis. However, this will only go so far, and the markets will begin to get away from the short-covering aspect, and look at the fundamentals again. I think there is a bit of resistance all the way to the 0.82 level, and as a result I suspect this will be a short-term trader’s market for some time.