GBP/USD Forecast: Rising channel remains intact

On a wild Monday, the GBP/USD pair rose to an intraday high of 1.5803, before falling back slightly to end the day at 1.5771. The multi-week range of 1.5460-1.5690 was finally breached on closing basis as the USD sellers dominated the arena. The risk aversion that began in Asia was carried over to Europe and US and led to the drop in the September rate hike bets.

It's more about Fed

The September fed funds futures now indicating only 25% probability of the rate hike happening in September, compared to 45% last week. The massive risk aversion witnessed yesterday appears to have convinced markets, the Fed may refrain from raising rates in September/December. However, Fed’s Lockhart appeared unfazed by the turmoil as he reiterated the US central bank is on track to raise short-term interest rates in the next few months. Moreover, the current risk aversion is more about Fed and less about China.

The economic slowdown in China is in progress for almost two years and thus the stock market collapse is only an adjustment to worsening fundamentals. The real story spooking markets appear to be the possible delay in Fed rate hike, which (rate hike) has been repeatedly sold as a net positive for the US economy and the world economy. The risk sentiment could stabilize once again, only if Fed officials talk up rate hike expectations or the incoming US data paints a bright picture of resilience to turmoil in China.

Technicals – Stiff resistance at 1.5790

Sterling’s daily close above 1.5690 has opened doors for a target of 1.5920-1.5930. However, the spot is moving in a rising channel on the 4-hour chart. Consequently, a stiff resistance is seen at 1.5790 (channel resistance). Only a close above the same (on 4-hourly chart) would open doors for a rally to 1.5878 (50% of Jul 14-Apr 15 plunge) and 1.5920-1.5930 levels. On the downside, a break below 1.5750 (23.6% of June rally) could push the pair back to 1.5690 levels. Overall, the outlook stays bullish on account of an upside break from 1.5460-1.5690 range.

EUR/USD Analysis: Vulnerable to technical correction in equities

The spot rose from 1.1370 to 1.1714, before ending the day at 1.1615. The sharp uptick was a result of the unwinding of carry trades after the risk aversion took a turn for the ugly in the early US session. The Nasdaq and the S&P 500 futures hit the circuit breakers, while the Dow Jones crashed 1000 points. However, that was followed by a recovery, which ensured the index closed 588 points lower. The S&P futures now trade 1.3% higher.

Upbeat German GDP could offer relief

The German Q2 GDP report could turn the sentiment in favour of the risky assets if it confirms the economy stayed resilient despite the Greek crisis and China turmoil. The disappointing data out of China and the possible delay in the rate hike in the US offers little hope about the growth story and spooked markets on Monday. Consequently, an upbeat German GDP figure could calm market nerves and trigger a technical correction in stocks. In such a case, the EUR could weaken. However, a weak German GDP would renew the risk aversion and help EUR re-test Monday’s high of 1.1714.

Technicals – Support at 1.1533

Euro’s impulsive move to 1.1714 followed by a drop to 1.1615 indicates the temporary top could be in place and the unit could witness sideways action today. The overbought conditions on the intraday RSI indicates the spot could witness a fall to 1.1533 (Feb 3 high) and 1.15 levels. However, fresh buying interest around 1.1533 could ensure the spot remains confined largely to a range of 1.1550-1.17 levels.