The GBP/USD pair rose to a high of 1.5156 levels on Friday, before trimming gains to end the week around 1.5105 levels. The better-than-expected US non-farm payrolls figure released on Friday convinced markets that the Fed would raise rates at Dec 16 meeting. However, the USD witnessed moderate gains.
Buy the Rumor, Sell the fact?
If history is anything to go by, then the US dollar may witness “Sell the fact” trade after (and If) the Fed raises rates on Dec 16th. However, the drop in the 2-year treasury note yield and a sharp rise in Gold on Friday may be an early indication of a possible “sell the fact trade” after Dec 16th. The two year yield mimics short-term rate hike bets, while Gold (a major beneficiary of currency debasement) is most vulnerable to policy tightening. Both appear to have priced-in a liftoff, which will be followed by a painfully slow policy tightening.
Still, the USD is likely to remain positive to sideways across the board ahead of the FOMC meeting. Meanwhile, Sterling could rise sharply today if the BOE’s Carney hints at a possible liftoff in the Q1. However, there are a number of constraints - worsening current account to GDP ratio, low inflation, weakening services activity. Hence, Carney may chose not to drop any rate hike hints later today.
Technicals – Could target 38.2% fib support
Sterling’s close on Friday below 1.5115 (50% of 1.5336-1.4895), followed by a failure to take out the same in Asia today indicates the currency is likely to drop to 10-DMA at 1.5076 and 1.5063 (38.2% of 1.5336-1.4895) in Europe. A rebound from 1.5063 could see the pair take out 1.5115 and strong resistance on the 4-hour chart at 1.5130 (100-MA). The upside, in such a case, could be restricted around 1.5185 (23.6% of July 2014-April 2015 plunge+falling trend line resistance). On the other hand, a break below 1.5063 would open doors for 1.5020-1.50 handle.
EUR/USD Analysis: Short-covering stalled at long-term trendline resistance
The EUR/USD pair fell on Friday after the upbeat US non-farm payrolls convinced markets that the Fed would move rates on Dec 16. The short-covering rally after Thursday’s ECB meeting saw the pair clock a high of 1.0981. The pair currently trades around 1.0865 levels.
EUR to track stock markets this week
Given the Fed liftoff is now a done deal, the focus now is on the stock markets. It is worth noting that during the last rounds of Fed policy tightening, the EUR was a risk currency, but now the EUR is a funding currency and hence could witness a sharp spike if the stock markets correct as we head into Fed’s Dec 16 meeting. The odds of a range bound movement in the stocks is high and thus the EUR/USD could find itself stuck in the range of 1.0750-1.10 levels till Dec 16th. The Eurozone industrial production due later today may not receive much attention from the markets.
Technicals – Could test support at 1.0812 (July low)
Euro’s failure to take out a long-term trend line (drawn from the March low-April low) resistance at 1.0985 on Friday, followed by a close below 1.0891 (38.2% of 1.1495-1.0517) indicates the currency could drop to 1.0812 (July low) today. a break lower would expose 1.0750. On the other hand, a rebound from 1.0812 could see the pair 1.10 handle in the days ahead.
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