How High Could The Euro And Pound Go?

Written by ForexTraders.com on July 27, 2010 at 10:14 AM ET

The EUR/USD and GBP/USD have made incredibly strong moves to the upside in the month of July.  In fact, the degree of momentum and volatility in the bullish rally in both of these pairs has caught many market participant by surprise.  Historically, summer trading months tend to be rather slow with low volatility and small daily moves, but the current global economic concerns have caused strong volatility to remain in the markets throughout this summer.
Currently, the Euro and Pound are both coming into major resistance to the upside on higher timeframes.  We will take a look at each pair, identify these key areas of resistance, and discuss what is needed for these pairs to move higher.

EURO

 
The EURO is about to his major resistance at the 38% retracement of the entire move down from November 2009 to June 2010.  Each currency pair tends to have its own specific relationship to the Fibonacci numbers.  The Euro, more than other pairs, tends to love the 38% retracement and often reacts well to it.  Thus, we could see a strong corrective failure begin to develop as price comes into the 1.3110 area.

Also, many large players in the FX Market are still very bearish on the pair overall.  Much of the move we have seen from the June lows was a short covering as it became clear to investors that Greece was not going to default immediately due to the bailout funds that were put in place by the European Central Bank and the International Monetary Fund.  Thus, the move off the June lows could still be seen as a corrective wave in our overall downtrend in the Euro, and if this is the case, we could put in a top in the 3110 area.  However, if the bullish sentiment in the Euro is strong and the fundamentals continue to support a strong Euro, the price could plow through the 3110 area and test the next area of major resistance at 1.3300.  The current move on the Euro from its Junes lows has not really seen a significant retracement, as the move has been very strong; thus, the pair may take a bit of  a breather around the 3100 level before moving higher.

Fundamentally, the Euro is being supported by a steady wave of positive economic data out of Europe.  Last week and this week have served a challenging blow to Euro bears.  Today, all European economic figures came out positive, but most notably was the German Consumer Climate.  German Consumer climate beat market expectations by .3%, which is further evidence that the recovery is gaining traction among the European population.  Consumer Confidence comes out in the U.S. Tuesday morning, and if it surprises to the upside, it could help to push the Euro even higher.  A positive consumer base is essential to economic recovery, and if that is in place, investors will be much more willing to take risk on their investments.

Pound

In similar fashion to the Euro, the GBP/USD has made a very strong upward move in the month of July.  Although the momentum and volatility has not been quite as intense as the Euro, the Pound has still moved in a very strong manner.  Currently, as seen in the chart above, the Pound is hitting major overhead resistance at 1.5550.  This price area is the 50% fib retracement of the overall move from November 2009 to June 2010.  As mentioned above, each currency pair tends to have a special relationship to fib retracement ratios.  Each currency tends to have certain fib levels where it really likes to react, and the Pound is no different.  The Pound loves the 50% fib retracement.  This level is also corresponding nicely with previous support/resistance as you can see again on the chart above.  Price formed a HI in April at this level and it also formed a nice base of support in late January before breaking through and retesting it in February.  Thus, this price level has good historical support/resistance, and it is the 50% fib retracement, so we could see the Pound struggle here, at least in the short term.  Economic data is continuing to support a more optimistic view of the current global economic recovery.

The major driver for the Pound to reach significantly higher levels will continue to be the possibility of a rate hike in the BOE.  When the 2008 Crisis unfolded every Central Bank in the developed world immediately set to work by slashing interest rates to unprecedented lows.  Those lows have now stayed in place for nearly 2 years.  The only Central Banks to have raised interest rates at this point are Australia and Canada.  The U.S., EuroZone, and U.K. have all kept rates at these historically low levels.  Among the U.S. and EuroZone there have been no official talks of raising interest rates.  In fact, in the U.S., Fed Chairman Ben Bernanke is actually making it clear that the Federal Reserve may in fact release more stimulus measures into the economy.

In the U.K., however, there is actually 1 board member who has voted for an interest rate hike at the last 2 Bank of England meetings.  The reason he wants a rate hike is due to inflationary pressures in the U.K.  Inflation readings are just beyond target levels, and an interest rate hike would help curb that inflation.  However, opponents are concerned that a premature interest rate hike could unintentionally derail the economic recovery.  If inflation fears continue to grow in the U.K. and more board members jump on board, wanting a rate hike, the GBP/USD could make an even more dramatic move against the U.S. Dollar.  The increasing yield spread between the US Dollar and the British Pound would cause many investors to seek the increased yield in the Pound and shirk the US Dollar.  If England does raise rates before the U.S., we could see the Pound move much higher.