GBP/USD Forecast: Bears in control ahead of US retail sales figure

The GBP/USD pair crashed to an intraday low of 1.4383 after the rout in the European stock markets and Sweden’s Riksbank’s rate cut surprise pushed the UK 10-yr gilt yield to a record low of 1.295%. The pair retraced from its lows, but ended on a softer note around 1.4475 levels.

Flight to safety hurts Pound

The drop in the yield to record lows clearly indicates the investors, scared out of the banking stocks, ran for cover and poured money into the government bonds. Bond yields in other core European nations also fell. 2-yr yield in Germany and France hit record lows. This flight to safety will continue to hurt Pound as the dropping yields (amid risk-off) also means increased prospects of BOE rate cut.

Moreover, the US 10-yr treasury yield was relatively resilient compared to UK 10-yr Gilt yield. Hence, the yield spread too was in favor of the USD. The spread may widen further in favor of USD if the risk-off tone persists today.

Eyes US Retail sales

Retail sales is the second most important figure after the non-farm payrolls report. Savings rate in US has gone up over the past year despite sustained labor market gains. This, coupled with the financial market instability in January may have forced consumers to save more rather than spend. However, economists see a rebound in the retail sales following December’s negative reading. It would take a stronger-than-expected headline and core retail sales figure to push the USD higher across the board. A contraction would only add to the risk-off tone and weigh over the USD. But again, Sterling may not be able to gain due to the risk aversion.

Technicals – Bearish 5-DMA and 10-DMA crossover

• Sterling’s failure to sustain above 1.4519-1.4516 (38.2% of 1.5230-1.4079 + 23.6% of 1.5930-1.4079) for the second day and a bearish 5-DMA and 10-DMA crossover, followed by a failure to sustain above 5-DMA in Asia today indicates the cross could be heading lower to 1.4383 (previous day’s low) once again.

• On the other higher, a break above 1.4519-1.4516 (38.2% of 1.5230-1.4079 + 23.6% of 1.5930-1.4079) would shift risk in favor of a rise to 1.4578 (Feb 10 high).

• Only a daily close above 1.4519 would open doors for a rally to 50-DMA currently seen at 1.4643.

EUR/USD Analysis – Bullish momentum running out of steam

The EUR/USD pair rose to three-month high of 1.1376 before falling back to trade around 1.13 handle. Carry unwind is the only reason responsible for the sharp rally in the pair, and given the concerns surrounding the banking sector, the risk-off tone may persist today as well. This may push EUR higher, however caution is advised as –

Greece issue is making a comeback, or at least the market thinks so – periphery bond yields are rising, while core yields drop.

And the hourly chart also shows rising tops on price and falling tops on RSI (divergence).

The German and Eurozone GDP figures may receive little/not attention from the markets, given the risk-off and the heavy action in the bond markets.

Technicals – Bearish RSI divergence

• As said earlier, the hourly chart shows a bearish price-RSI divergence.

• A break below 1.1290 (rising trend line – blue) would open doors for a drop to 1.1236 (38.2% of Mar low-Aug high).

• On the other hand, a break above 1.1376 (previous day’s high) could see the pair test 1.1418 (23.6% of Mar low-Aug high) levels.