It falls within the group of major support levels and the lower channel line

• EUR/GBP fell into a support group at the lower trendline of its descending channel.
• There is a good chance that the pair will find its feet and recover from this key technical level.

EUR/GBP continues to fall in a descending channel, clearly visible on the 4-hour chart below.

The descending sequence of highs and lows implies that the pair is in a short-term downtrend, and since “the trend is your friend”, this influences prices to further weakness.

However, even strongly trending prices pull back from time to time, and EUR/GBP touched the lower channel line of the channel, where it previously found support, and started countertrend reactions back inside the channel. There is a chance that the same will happen.

EUR/GBP 4-hour chart

Further supporting the pullback hypothesis is the fact that the Relative Strength Index (RSI) is heavily oversold. While this alone is not enough to signal a pullback, it cautions traders against adding to their short positions. Those looking to trade against the trend should wait for the RSI to break out of oversold and re-enter neutral territory before placing buy orders.

EUR/GBP is also testing both the 200-period simple moving average (SMA) and the 0.618 Fibonacci retracement level from the late June-early August rally at 0.8478. The 50-day SMA key is also tested on the daily chart (not shown). This confluence of support further increases the likelihood of a recovery.

The price itself forms what could end up as a Japanese Hammer candlestick reversal pattern on the current 4-hour bar, however, until the end of the period, it is not possible to be sure. For such patterns to gain confirmation, they must also be followed by a bullish green candle.

It is possible – given the near-term downtrend – that EUR/GBP will break below the channel line and continue to decline. A decisive break below the lower channel line would validate such a breakout. It would be a very bearish sign, but it is unlikely to last, as such moves are often signs of exhaustion.

A decisive break would be one accompanied by a longer-than-average red candlestick that closed below the channel line near its low, or three red candlesticks in a row that broke below the level.

The long-term trend (weekly chart) is still bearish, while the medium-term trend is bullish.