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By FXCompass — Friday, 26 February 2010

The ERUGBP spent the entire week moving up as the pound got crushed by unpromising UK economical outlook. Let us re-evaluate the situation by taking a look at what the technicals predict.

A nice down channel was developing on the daily chart since last October, and we could have expected another bounce off the resistance line (T1), but it didn’t happen. Instead, the price broke up above .8900 to reach its highest level since the beginning of the year.

On the same chart, we see the formation of a new support trendline (T2) — this one is heading up and was already tested four times.

What to expect next?

Well, we already have a channel break up which is a signal by itself. And in the long term, we have some support from T1.

We also notice how the Bollinger Bands contracted shortly before the move up and then widened right after, creating a “choking” effect. This pattern is a typical indication of a new direction in the price. Hence, the price is likely to continue its way up and move within the upper portion of the band before reversing.

We could open a long position right now, but it would be best to wait for a retracement — usually a bounce off the broken trendline.

Next, we’ve indentified a resistance line (R1, .9033), in order to set a profit target.

Notice how the pair reacted during the last breakout, in August. We had the same BB choking effect, a retracement, and then a continuation of the up move. This is exactly what we hope will happen next.