EUR/GBP has touched an important support level at 0.88700 and held above the support. As seen on a 4H chart below, Euro could be in a high danger if it goes down below that support.
Correction of December 25, 2020 has formed a sharp descending triangle and a breakout from its upper edge will signal a strong uptrend. First resistances to watch if the breakout is confirmed are 0.89440 and 0.90000. Resistance at 0.89440 is very important and further price action of the pair upon testing of this level will be decisive.
On the other hand there are two other patterns one should watch when trading EUR/GBP. The chart above has formed a Head and Shoulders pattern and the support of 0.88700 acted as a neckline. Since the pair is still above the neckline there is no confirmation of the pattern, however if the pair closes lower the 0.88700 support it will continue the downtrend to 0.87900 and to 0.86900 below that to complete the Head and Shoulders pattern.
An hourly chart of EUR/GBP has another pattern formed, which supports the downtrend, the inverted cup and handle.
What this pattern in general tells is that bears are in charge and after a slight correction upwards, the downtrend will continue breaking the lowest support, which in this case is 0.88700.
Factors that might support the downtrend of EUR/GBP are extensions of lockdowns in the Eurozone as the number of Covid-19 cases surge in previously highly affected regions such as Spain and Italy. The political developments in Italy also play a significant role in an economic recovery and further stability of the Eurozone. Italy was the hot zone of the Covid-19 pandemic in Europe and had the largest EU aid. The dispute in the government is related to the 750bn Euro bill, where the former PM Renzi wants to invest the money in digital economy and green energy, and the current PM Conte would like to spend 209bn Euro for Covid-19 relief.
The economic data from the UK sounds very promising as well, for instance PPI input (MoM) as per December which will be released tomorrow is expected to be higher by 0.5bp than in November, moreover Retail sales and Core retail sales data from the UK which will be announced this Friday, January 22 are looking very positive. The forecasted Retail sales (MoM) as per December is 5bp higher related to the November’s -3.8.