EUR/GBP continues descending within a falling channel, clearly visible on the 4-hour chart below. 

The declining sequence of peaks and troughs supposes the pair is in a short-term downtrend, and given “the trend is your friend” this biases prices to further weakness. 

However, even strongly trending prices experience pull backs from time to time, and EUR/GBP has reached the lower channel line of the channel where previously it found support and began counter-trend reactions back up inside the channel. There is a chance the same may happen again. 

EUR/GBP 4-hour Chart 

(Click on image to enlarge)

Further supporting the pull-back hypothesis is the fact the Relative Strength Index (RSI) is heavily oversold. Although this alone is not enough to signal a recovery it does caution traders not to add to their short positions. Those wishing to trade the counter-trend rally should wait for RSI to exit oversold and re-enter neutral territory before placing buy orders. 

EUR/GBP is also testing both the 200-period Simple Moving Average (SMA) and the 0.618 Fibonacci retracement level of the late-June and early-August rally at 0.8478. On the daily chart (not shown) it is also testing the key 50-day SMA. This confluence of support further increases the probability of a recovery unfolding.

The price itself is forming what might end up as a bullish Hammer Japanese candlestick reversal pattern on the current 4-hour bar, however, until the period ends it is not possible to be certain. For such patterns to gain confirmation they also need to be followed by a bullish green candle. 

It is possible – given the short-term downtrend – that EUR/GBP could break below the channel line and continue falling. A decisive break below the lower channel line would validate such a breakout. It would be a very bearish sign but unlikely to last as such moves are often signs of exhaustion. 

A decisive break would be one accompanied by a longer-than-average red candlestick which closed below the channel line near its low, or three red candlesticks in a row that broke below the level. 

The long-term trend (weekly chart) is still bearish whilst the medium-term trend is bullish.

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