GBP/USD Forecast: Bears in control, forced tightening in the US

The GBP/USD pair fell to a low of 1.5306 as the dovish ECB and an interest rate cut from the PBOC led to a broad based strength in the US dollar. The pair suffered a daily close below its 200-DMA seen at 1.5331. The strong UK retail sales report released last week failed to take out the falling trend line resistance on the daily chart, leading to a sell-off on Friday.

Forced tightening in the US

The Fed did surprise markets with its dovish stance in September, however the developments last week have led to a forced tightening in the US. Draghi’s hint at more easing in December and a rate cut in China led to broad based USD rally, which is nothing but indirect policy tightening ahead of the Fed meet this week. Consequently, there is very little room for the Fed to talk up rate hike bets and thus long USD is a risky trade this week.

For today, the focus is likely to be on the UK CBI Trends Survey figure for October. The number is likely to show total orders and export orders deteriorated further to -9 due to drop in the overseas demand. A weaker number won’t be a surprise, but could weigh over Sterling. Later in the US, a strong New Home Sales could add to USD strength.

Technicals – Bearish below 1.5387

Sterling witnessed a minor rally in Asia to its 200-DMA at 1.5331. Friday’s closing below 1.5387 followed by a failure to sustain above 1.5308 (50% of 1.5107-1.5509) today could take the pair down to 1.5260 (61.8% of 1.5107-1.5509) – 1.5248 (50% of Apr-Jun rally). On the higher side, an attempt at 1.5387 could be made, however, a failure to take out 1.5387 would further reinforce the bears. Only a daily close above 1.5387 would open doors for a re-test of 1.5430 (falling trend line resistance on the daily chart).

EUR/USD Analysis: oversold on Intraday charts, Eyes German IFO

The EUR/USD pair traded around 1.11 handle in Europe on Friday before falling to 1.10 levels in the NY session after a surprise rate cut from China triggered a broad based USD rally. In just two trading days, the pair took out key support levels and even breached the rising trend line (from March lows) support. The pair found support in Asia today at 1.10 and moved up to trade around 1.1040 levels.

Risk of weak German IFO readings

Germany’s exposure to China has become evident in the last few days, especially after the trade data showed a sharp slowdown in the exports. Even President Draghi said last week at the ECB press conference accepted that the German economy is more exposed to China than any other EZ nation. Germany’s exports to China amount of 10% of its total exports. Consequently, the IFO readings – business climate, current assessment, expectations – due today could surprise on the downside, leading to a drop below 1.10 levels. Any negative German/EZ data would only underscore the need to do more on the part of the ECB and hurt the EUR

Technicals – Bulls need daily close above 1.11 (rising trend line resistance)

Euro’s sharp sell-off in the last two days has left the currency oversold on the hourly and the 4-hour chart. Thus, a better-than-expected German IFO could trigger a technical recovery and push the spot to 1.11 handle (rising trend line resistance). However, the bulls could make a comeback only in case of a daily close above 1.11. On the other hand, a weak IFO could trigger a break below 1.10 and open doors for a sell-off to 1.0954 (June 29 low).