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#1 07-01-2021 11:21:46

Admin & Trader
From: Paris - France
Registered: 21-12-2009
Posts: 3068

EUR/GBP: a new pivot point for the pair

EUR/GBP: a new pivot point for the pair

The EUR/GBP, one of the most traded currency pairs, reflects the differences between the UK and Eurozone economies. It also shows the differences between the monetary policies pursued by the Bank of England and the European Central Bank.

Since the Brexit referendum 5 years ago, the EUR/GBP also reflects something else. This is what Brexit has brought for both currencies, seen through the prism of the foreign exchange market.

Brexit has led to a fall in the British pound.

A currency can depreciate for a variety of reasons. Sometimes the central bank intends to do so in the hope that the economy will do better and that local products will become more competitive on international markets. Other times, the currency depreciates because of perceived market weakness. If market participants believe that one currency is overvalued relative to another, the exchange rate is the first to move, long before the economy reveals its weakness.

The above chart speaks for itself. The Brexit has caused the British pound to fall not only against the euro, but also in general. Indeed, a depreciation of the British pound at such a rapid pace reflects the dissipation of wealth. This year's pound no longer buys what it bought 5 years ago. This may be a good thing for the economy, provided the currency does not continue to depreciate, but it is a negative for households.

The 0.90 level proved to be a pivot for the EUR/GBP pair. This is not the first time the market has consolidated at this level; only this time the consolidation is taking longer than in the past.

For bulls, the longer the pair stays close to 0.90, the greater the chances that it will try to reach parity. It can be said that the market is forming a bullish flag on the monthly chart.

On the other hand, bears can argue that the market is likely to form a double top. The first attempt above 0.90 12 years ago was followed by a second attempt when the Brexit ended.

Perhaps the most important element of the above chart is the impact of fundamentals on an exchange rate. Traders typically use fundamental analysis to position themselves on long term trades. This time the bet on the fall of the British pound against the euro following Brexit has paid off. All that was needed was to wait patiently for the end of the process.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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