EURGBP Correction Setup (May 2, 2015)

The pair bounced off support around .7735 and seems to be making a correction from its drop.

Applying the Fib tool on the latest swing high and low shows that the 61.8% Fibonacci retracement level lines up with the broken trend line, which might now hold as resistance. Meanwhile, the moving averages are in between the 38.2% and 50% Fib levels.

The 100 SMA is starting to cross below the longer-term 200 SMA to confirm that the path of least resistance is to the downside. Also, stochastic is indicating overbought conditions while RSI is starting to turn lower, indicating a return in bearish pressure. In that case, EURGBP could head back to the previous lows or much lower.

Euro zone flash CPI readings came in weaker than expected on Friday, leading traders to price in stronger odds of additional ECB easing. The headline estimate fell from 1.0% to 0.8% versus expectations at 0.9% while the core figure showed a 0.2% decline. However, the preliminary GDP beat expectations at 0.6%. Other medium-tier reports from the region's top economies came in stronger than expected, except for the German retail sales report which showed a 1.1% drop.

There have been no major reports out of the UK on Friday but its medium-tier releases were mostly disappointing. Still, the anti-Brexit sentiment may be influencing voters' decisions and might lead them to favor staying in the EU during next month's referendum.

This week, the UK PMI releases could serve as catalysts for the pair, with strong data likely to renew support for the pound. Another batch of medium-tier reports are lined up from euro zone economies.

By Kate Curtis from Trader's Way