Image Source: Pixabay

Heading into the last week of the season, anything can happen! Many times, large institutional traders who haven’t wrapped up their books yet are looking to capitalize on illiquid markets and try to squeeze their last profits into year-end.  One way to do this is by jumping into a trending asset and hope to ride the train as that asset continues to trend, knocking out stop losses along the way. Could that be the situation for EUR/GBP?

Recall that on December 15^th, both the Bank of England and the European Central Bank hiked interest rates by 50bps. However, the BoE was a bit dovish whereas the ECB was hawkish. The BoE had two members vote in favor of keeping rates unchanged at 3%, arguing that the current level of interest rates was “more than sufficient” to bring CPI back to target.  In addition, the statement excluded the wording that “policy is not on a pre-set path” and that changes to the “scale, pace and timing” of interest rates will depend on the outlook. This may be an indication that rate hikes will slow moving forward. The ECB had a unanimous vote to hike interest rates by 50bps.  In addition, Christine Lagarde was hawkish in her press conference, noting that its “obvious that we should expect 50bps hikes for a period of time”. She even suggested the possibility of three more 50bps hikes.  As a result, EUR/GBP moved aggressively higher and hasn’t looked back since. Is this the trend that traders will try and ride into the end of the year?

EUR/GBP had been moving lower in an orderly channel for roughly a year before breaking above the channel on May 6^th near 0.8500.  The pair came back to retest the top trendline in late July, only to fail.  The EUR/GBP continued to move higher, ultimately peaking on September 26^th near 0.9278 as former Prime Minister Liz Truss failed to gain confidence with her “mini-budget” proposal.  After the Bank of England saved the UK bond market, faith was restored and the pair fell back to previous lows near 0.8550, holding just above the 200 Day Moving Average.  However, after the BoE and ECB meetings on December 15^th, EUR/GBP moved from 0.8704 to resistance at 0.8828.  On December 27^th, the pair broke above those prior highs, reaching an intra-day high of 0.8857, its highest level since October 12^th.

Source: Tradingview, Stone X

On a 240-minute timeframe, on December 15^th EUR/GBP broke out above a downward sloping trendline dating to November 22 and continued moving higher.  If the trend is to continue into year-end, the pair must break above the 50% retracement and the 61.8% Fibonacci retracement from the highs of September 22^nd to the lows of December 1^st at 0.8913 and 0.8999, respectively,  Above there, resistance is at the highs from September 28^th at 0.9062.  However, notice that the RSI has made three lower highs while price has made 3 higher highs.  This is an indication that the pair may be ready for a pullback. First support is at the highs from December 16^th at 0.8828, then the lows from December 19^th at 0.8691.  Below there, price can all to the long-term horizontal support at 0.8566.

Source: Tradingview, Stone X

The last week of the year can be a tough time to trade as many traders have already closed their books for the year.  Therefore, trends could remain in place as money managers try and squeeze as much profit as they can for the year.  EUR/GBP could be one of the fx pairs they use.  Manage risk accordingly!

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