Brexit breakout could target .8000 or .8100 next

February 25, 2016

At the beginning of the week, we highlighted the massive market uncertainty surrounding the upcoming vote on “Brexit”(UK exit from the European Union), concluding that, “While it’s difficult to handicap the near-term price action, we’re inclined to look for more downside in GBP/USD given the ongoing uncertainty and bearish momentum. A close below 1.4080 would likely open the door for a run down to psychological support at 1.40, if not lower.” With the pair hitting a low near 1.3880 this morning, you could argue that even that bearish view was too conservative.

The impact on the EUR/GBP cross has been nearly as severe. Since forming a long-term base in the .7000-.7500 region throughout 2015, the unit has turned definitively higher thus far this year, tracking the rising uncertainty surrounding Brexit. While no one is definitively sure what a Brexit would mean for the UK and Eurozone economies (after all, it’s never happened before), traders tend to sell first and ask questions later when uncertainty is on the rise.

On a technical basis, EUR/GBP is in the middle of a potentially critical breakout. Rates are peeking out above the 50% Fibonacci retracement of the entire February 2013-July 2015 drop at .7875. Meanwhile, a steep bullish trend line connecting four separate lows (including at the end of last week) has formed and continues to provide strong support. Even the RSI is pointing higher, with the widely-watched indicator holding within a clear bullish range from 55 to 75.

Assuming today’s breakout is maintained with a close above .7875, further gains are favored in EUR/GBP. The next nearby level of resistance is psychological resistance at the .8000 handle, followed by the 61.8% Fibonacci retracement up at .8100. Only a reversal and break below the established bullish trend line (currently near .7775) would invalidate the near-term bullish bias.

For a pair that was constrained to a 500-pip range for most of last year, EUR/GBP volatility has come back with a vengeance so far in 2016.

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