Euro May Strengthen Versus Pound on Bullish Reversal: Technical Analysis

The euro may advance to a three- month high against the pound after the shared currency’s recent sell-off failed to set a new low for the first time since February, RBC Capital Markets said.

The 16-nation currency dropped as far as 81.42 pence last month, staying above its June low of 80.68 pence. The euro’s close above 83.20 pence yesterday signals “a bullish trend reversal,” said George Davis, chief technical analyst in Toronto at the unit of Canada’s largest lender.

“This is the first time since February that a sell-off has failed to establish a new low,” Davis wrote in a note to clients. “Bearish sentiment may be eroding.”

The euro traded at 83.17 pence as of 11:25 a.m. in Tokyo after climbing for a third day yesterday. The currency has risen 3.1 percent from this year’s low of 80.68 pence on June 29.

The European currency’s next target is 84.82 pence, a 38.2 percent retracement of its decline between March and June, Davis said, referring to one of the numbers of the so-called Fibonacci sequence. The euro may then climb to 85.32 pence, he said, matching its July high which was the strongest since May 28.

The euro will strengthen to 82 pence by year-end, according to the median forecast of analysts in a Bloomberg News survey.

Fibonacci analysis is based on a theory that prices rise or fall by certain percentages after reaching a high or low. Key percentages include 23.6, 38.2, 50 and 61.8.

In technical analysis, investors and analysts study charts of trading patterns to forecast changes in a security, commodity, currency or index. Fibonacci analysis is based on the theory that prices rise or fall by certain percentages after reaching a high or low.

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