Megaphone Pattern Predicts more Downside on the EUR/GBP | Forex Technicals

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Megaphone Pattern Predicts more Downside on the EUR/GBP

The ECB cut .5% from the central bank target rate to 3.0%. That news was probably expected by most traders. However, the admission by the chief central banker, Trichet, that more rate cuts may be coming is hurting the EUR. Not to be outdone, the BoE also cut the target rate in the UK a full point and a half. That brings the target rate in the UK below the target rate from the ECB for the first time since the introduction of the Euro. Megaphone pattern

The rate cuts themselves are not a surprise but they do emphasize the fact that monetary policy makers are still grappling with uncertainty in the market. That uncertainty is escalating risk and volatility in most of the capital markets but that is not necessarily a bad thing for active traders.

One specific opportunity emerging on the EUR/GBP currently is becoming very interesting. The uncertainty from the European Central Bank is helping to push the EUR down against the GBP, which is inline with what we would expect to happen with the broadening formation that is currently in play.

EUR/GBP Daily Chart
EUR/GBP

The technical formation shown in the chart above is a broadening or megaphone pattern. Increasing volatility or wider price swings give it a natual bias to the downside but a breakout above either barrier is a good trading signal. Typically traders will look for a bounce off resistance at the top of the pattern to go short with a stop set at the previous high.

The initial profit target is the support level at the bottom of the pattern. A breakout at that point is a good signal to add to a short position. The megaphone pattern quite often forms around a horizontal channel and may take some time to form. On the daily charts, the pattern may take a few months to appear and breakout but the subsequent moves are significant. At this point I am looking for more downside in the pair targeting the .7675 support level.