Euro May Fall to 8-Month Low Against Pound: Technical Analysis

By Ron Harui

July 31 (Bloomberg) -- The euro may weaken to an eight- month low of 82.36 British pence should the 16-nation currency close below so-called support at 85.09 pence, RBC Capital Markets said, citing trading patterns.

The level of 85.09 pence represents support on an ascending trend line that connects the euro’s lows of Oct. 20 and June 22, according to RBC’s chart. Europe’s single currency yesterday closed below initial support at 85.71 pence, which signals a “bearish” short-term reversal, George Davis, chief technical analyst at RBC, wrote yesterday in a note to clients. Support refers to a level where buy orders may be clustered.

“This has set the stage for a test of the key intermediate trend line at 85.09 that dates back to October,” Toronto-based Davis wrote. “A daily close below 85.09 would be an extremely bearish development as it would indicate that the intermediate downtrend is set to resume in earnest.”

The euro traded at 85.34 pence as of 9:58 a.m. in Tokyo from 85.31 pence in New York yesterday, when it declined to 85.04 pence, the lowest level since June 30. The European currency has fallen 1.3 percent versus the pound since July 24, heading for its first weekly loss since June 19.

Should the euro post a daily close below 85.09 pence, it is likely to extend losses to the June low of 84 pence, and then move toward 83.31 pence and the Nov. 28 low of 82.36 pence, Davis said.

Daily momentum indicators such as the stochastic oscillator chart also signal the euro will fall against the pound as they are “tracing out a bearish divergence that began from overbought levels in mid-July,” Davis wrote.

A stochastic oscillator chart measures the closing price of a security relative to its highs and lows during a particular period to try to predict whether it will rise or fall. In technical analysis, investors and analysts study charts of trading patterns and prices to forecast price changes in a security, commodity, currency or index.

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net.