EURGBP Symmetrical Triangle (Dec 18, 2014)

This suggests indecision between buyers and sellers, with a potential breakout in either direction looming.

Price has just tested the top of the triangle around the .8000 major psychological resistance and is head for the bottom near the .7850 minor psychological support. A bounce off this level could lead to another move to the top while a breakdown could lead to as much as 300 pips in losses, which is the same height as the chart formation. Similarly, an upside breakout could result to a 300-pip rally.

Stochastic is moving down for now, indicating that sellers are in control. However, the oscillator is about to reach the oversold area and crossing up from this level would mean that buying pressure is taking hold.

Event risks for this trade include the release of the German Ifo business climate index and the U.K. retail sales report today. The business index is expected to improve from 104.7 to 105.6, which would reflect stronger optimism. Meanwhile, U.K. retail sales might see a 0.3% increase, following the previous month’s 0.8% gain.

An upside surprise could be likely for U.K. retail sales, given how the latest jobs report has surprised to the upside. Improving hiring conditions could lend support to consumer spending, as individuals feel more confident in their financial situation. A stronger than expected reading could lead to a move back to .7850 or perhaps a break below the triangle support.

Better than expected German business sentiment data could keep the consolidation intact though, as traders hesitate to commit to a strong longer-term bias for this pair. Bear in mind though that the ECB has cut interest rates in a couple of instances so far this year while the BOE’s next move is likely to be a rate hike, although the time frame has been pushed back.

By Kate Curtis from Trader's Way