EURUSD and EURGBP point to a correction ahead of German election weekend

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The common currency has been supported by a string of positive economic developments. The ECB’s meeting also helped traders to maintain their bullish outlook for the euro. As the clock ticks closer to the German elections which are now just a week away, traders are likely to turn cautious.

The rally in the euro has been strong and swift. Most traders might have been caught unawares when the euro started its ascent around June when the ECB President Mario Draghi gave a hawkish speech in Sintra, Portugal.

While elections in Europe have always been a cause for uncertainty, that doesn’t seem to be the case with Germany. Angela Merkel’s CDU/CSU party has managed to further consolidate their lead if latest polls are to be believed.

German Election: Introducing The Main Parties – From CDU to AfD

A report from Deutsche Welle (DW) showed that over the weekend, the CDU/CSU maintained its lead at 37%. However, the strongest contender to Merkel, Martin Schultz’s Social Democratic Party (SPD) slipped to 20% and is seen below 23% that the party garnered in the 2009 general elections.

Interestingly though the Alternative for Germany (AfD) has managed to make strong inroads, with the party positioned in the third place. Based on the opinion polls, the AfD is expected to gain some seats in the Bundestag for the first time.

The AfD is a right-wing anti-EU populist political establishment. The party came to power in 2013 in the midst of the immigration crisis that tested the Eurozone to the seams. Latest data shows that the AfD has managed to gain representation in 13 out of the 16 state parliaments.

Although the AfD is no match for the CDU/CSU establishment, the fact that the newly established party has managed to make an impression is something to bear in mind. Thus, there could be some risks in store as investors turn cautious ahead of the polling on September 24th.

This cautiousness is well represented in the technical outlooks for both the EURUSD and the EURGBP.

EURUSD – Price at resistance

The weekly chart for EURUSD shows that price action has practically stalled near the resistance level of 1.2042 – 1.1955. We also see the strong reverse bearish divergence on the chart. Although this points to a potential correction to the downside, there is an equal chance that EURUSD could break out above this resistance level.

EURUSD at cross roads near resistance
EURUSD at crossroads near resistance

This would be a major milestone for the EURUSD as the upside will increase strongly with 1.2800 likely to be the next target. In the event that EURUSD manages to post a correction, we could, however, expect to see 1.1443 to be the likely downside target as price action will correct to establish support at this level.

Such a scenario will offer traders a good opportunity to renew their positions to the upside.

EURGBP – Approaching support at 0.8656

The strong rally in the British pound saw the euro weakening last week. As previously noted, price action has posted a strong reversal with the currency pair losing over 3% just last week alone, closing at 0.8787.

EURGBP marking a correction to 0.8565
EURGBP marking a correction to 0.8565

We expect that this bearish momentum will continue into this week as EURGBP approaches the price level of 0.8656. This will mark a retest where support could be established at the price level that previously served as resistance.

A bounce off 0.8656 in EURGBP will see the upside being renewed again. The weekly chart’s bullish flag pattern suggests further upside. However, the price will need to break out from the previous highs of 0.9253 in order to push higher towards 0.9558 and 1.0252 levels which mark the measured move of the bullish flag continuation pattern.

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