EUR/GBP deformed bullish pennant brings into question further up moves.

NoEUR/GBP comes under selling pressure deforming the bullish price pattern that had been forming.Hopes for a fiscal boost from the new UK PM, more aggressive BoE rate hikes lift the GBP.The euro draws support from a weaker USD and helps limit any further losses for the cross.

The EUR/GBP cross is extending its retracement slide from a two-month high touched last week and losing ground for the second successive day on Tuesday. The downward trajectory drags spot prices to a four-day low during the early European session and brings into the doubt the continuation of August’s solid uptrend – though bulls are showing some resilience below the 0.8600 mark.

The news British Prime Minister Liz Truss is expected to finalize a two-year package of energy relief for households and businesses within days. This comes at a time when the country is facing a cost-of-living crisis and provides a much-needed respite to the British pound. This, along with hawkish remarks by the Bank of England policymaker Catherine Mann, is seen as another factor behind sterling’s relative outperformance and exerts downward pressure on the EUR/GBP cross.

That said, a bleak outlook for the UK economy holds back the GBP bulls from placing aggressive bets. It is worth recalling that the Bank of England had warned last month that the UK economy will enter a prolonged recession during Q4 2022. Adding to this, the British Chambers of Commerce (BCC) now expects the UK economy to record three consecutive quarters of contraction. This, along with a modest pickup in demand for the shared currency helps limit losses for the EUR/GBP cross.

The euro draws some support from the ongoing US dollar profit-taking slide from a two-decade high set on Monday. That said, worries about a potential economic recession in the Eurozone, fueled by Russia’s indefinite closure of its main gas supply pipeline, could act as a headwind for the common currency. The mixed fundamental backdrop warrants some caution before placing aggressive directional bets around the EUR/GBP cross amid absent relevant market-moving economic releases on Tuesday.

From a technical perspective the pair has been consolidating in what resembles a bullish pennant pattern after a short sharp climb in late August. Whilst today’s weakness has deformed the pennant and brought it into question its validity, it could still play out, pushing prices higher. If the pennant activates and the next leg materializes it will do so with a break above the 0.6876 highs on high volume, and then continue to at least 0.8718 followed by 0.8759 – the 61.8% Fibonacci extension of the upmove. 

Alternatively, a break out of the bottom of the pennant could signal a devestating drop, with a move below 0.8570 (August 31 low) providing the first signs of a much deeper slide, and probably leading to a capitualtion down to 0.8500 and the 100-day SMA, which will break the fall.   

More cautious investors might prefer to move to the sidelines ahead of the key event risk – the European Central Bank meeting on Thursday. The record-high inflation in the Eurozone has raised expectations for another bumper interest hike by the ECB. Nevertheless, the outcome and the near-term policy outlook will play a key role in influencing the euro and help determine the next leg of a directional move for the EUR/GBP cross.

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