GBP/USD Forecast: Spinning bottom, Re-test of weekly 50-MA

The GBP/USD pair fell to an intraday low of 1.5335 before profit taking ahead of the weekend ensured the spot closed at 1.5385; its lowest weekly closing since early June. The last week’s drop in Pound could be blamed on two factors – technical failure and stability in risk sentiment and the resulting rise in risk-on currency USD.

GBP could correct after USD recovery last week

Monetary policy makers at Jackson Hole played down China risk. I have been repeatedly pointing out that dropping Fed rate hike speculation is behind the recent turmoil in the global markets and not the drop in the Chinese equities –( which is just the markets falling in line with economic data that has been pointing to a slowdown since 3-4 years). However, turmoil in Chinese markets led to a drop in Fed rate hike (net positive for US and globe!) speculation.

Consequently, policymakers, including Mark Carney playing down China risk is hardly a surprise. Carney once again re-iterated that interest rates could rise at the turn of this year. Hence, similar to the recovery in the USD seen last week, the GBP could recover losses today. A correction in the GBP/USD pair to weekly 50-MA at 1.5460 after a four day losing streak appears likely today. Given the Fed is expected to raise rates before the BOE, the rally/recovery in the USD against majors due to risk on sentiment would be usually followed by a rally/recovery in the GBP/USD pair and GBP/comm $ pairs.

Technicals – Spinning bottom

Sterling closed well below 1.5460 on Thursday, confirming a downside breakout from 1.5460-1.5690 range. The spot, however, managed to sustain above 1.5330 (July 8 low) and closed at 1.5385 on Friday, thereby forming a spinning bottom candlestick on the daily chart. This, coupled with the oversold conditions on intraday charts after four day losing streak could lead to sideways to positive movement today. The recovery above 1.5409 (38.2% of Apr-Jun) in the Asian session has opened doors for a re-test of 1.5460 (weekly 50-MA) – 1.5482 (100-DMA). On the downside, a rise to 1.5460-1.5480 followed by a drop below 1.5450 (23.6% of last week’s fall) could see the pair re-test 1.5335-1.5330 levels.

EUR/USD Analysis: Fall in EZ Core CPI could weigh over EUR

The EUR fell to a fresh 1-week low at 1.1156 on Friday as positive data from the US added to optimism over the strength of the country's economy, while Fed’s officials playing down China risk on Friday also fueled more speculation over a possible September rate hike. EUR/USD moved higher after finding from the low of 1.1232 in Asia to 1.1310 in European morning, before the price came under renewed selling pressure ahead of New York open.

Focus on Core CPI

The preliminary Eurozone CPI figure for Aug could miss the estimate owing to the recent drop in the energy prices. Consequently, a weaker CPI could be ignored so long as the core CPI prints in line with the estimate or beat the estimate. Only a weaker than expected core CPI could put back the focus on monetary policy divergence and weigh over the EUR. Moreover, the ECB’s preferred gauge of inflation is more sensitive to crude prices. So the headline figure could be a big miss compared to estimates.

Meanwhile, German retail sales could provide a positive surprise heading into the EU CPI. Furthermore, the weakness in the Asian equities, US index futures and possible drop in the European equities could add to EUR strength.

Sterling – falling trend line breached on the hourly chart

Euro’s recovery from the low of 1.1166 and breakout from the falling trend line on the hourly chart has opened doors for a re-test of 200-DMA located at 1.1304. Fresh offers could hit the pair around 1.1296 (23.6% of May 14-Mar 15 plunge). A failure to take out 1.1296 followed by a drop below the falling trend line on the hourly chart would bring in more offers and push the spot to 1.1155-1.11 handle.