EURGBP has been in free fall since March 19th, when it rose to 0.9500. A month and a half later now, the pair is hovering below 0.8730, down 8% from the peak. Is the downtrend going to continue or should we expect a change of direction? That is the question we hope to answer in this short article.
Currency exchange rates are impacted by many factors such as central bank policies, imports/exports, , government debts and traders’ speculations, to name a few. Add COVID-19 to the mix and the situation becomes nearly impossible to understand. So instead of tracking all those factors, we prefer to focus on the price charts, which reflect them all, and search for patterns there.
EURGBP’s 4-hour chart reveals that the decline from 0.9500 is an almost complete five-wave impulse. The pattern is labeled 1-2-3-4-5 on the condition that wave 5 is still developing. Wave 3 is extended and its five sub-waves are also visible. Wave 4, in turn, is an a-b-c-d-e triangle correction.
Triangles precede the final wave of the larger sequence. This means that once wave 5 is over, a bullish reversal can be expected. Besides, according to the Elliott Wave principle, a three-wave correction in the other direction follows every impulse.
If this count is correct, we should anticipate a new low in EURGBP to form around 0.8600 – 0.8500. But instead of seeing this new low as a reason to join the bears, traders should prepare for a move in the opposite direction. Once wave 5 is over, a recovery to 0.8900 or higher would make sense.
What will EURUSD, USDJPY and USDCAD bring next week? That is the subject of discussion in our next premium analyses due out late Sunday!