GBPUSD

The GBP/USD pair fell to a low of 1.5107 on Monday before trimming losses slightly to end around 1.5140 levels. The sharp losses in oil once again dragged the currency lower. The oil dive surely brings inflation expectations lower, but the slide in Pound was due to the fact that the energy and mining sector in the UK is exposed to slide in commodities and could end up adding to unemployment.

CPI-driven rally in Sterling could be short-lived

The CPI in November is seen contracting 0.1% m/m, but is seen rising 0.1% y/y in November. Meanwhile, core inflation is seen rising 1.2% y/y compared to 1.1% rise seen in October. Sterling could rally if the headline CPI figure prints better-than-estimates, however, oil prices have fallen sharply in December and that means any rebound in the headline CPI is likely to be short-lived. Hence, markets are likely to sell Sterling on rallies if – headline CPI beats estimates, but core disappoints. On the other hand, a more sustainable rally in Sterling could be seen if both the headline and core CPI numbers blow past expectations (cable could take out 1.5248). An upbeat core number alone may be enough as well.

A similar logic is applicable in case of the US CPI due later in the day. The core figure across the pond is also expected to tick higher. If it does, the Cable could complete a lap as an strong core number released a day before Fed meeting could strengthen the USD.

Technicals – Could revisit 23.6% Fib support

  • Sterling’s recovery from 1.5113 (23.6% of 1.5819-1.4895) accompanied by a bullish 5-DMA and 10-DMA appears to have run out of steam at 1.5185 (23.6% of July 2014-April 2015 plunge).

  • This, coupled with a daily close below 1.5159 (Dec 3 high) on Monday indicates the offers could return and push the pair back to 1.5113 in Europe.

  • On the other hand, a break above 1.5185 (23.6% of July 2014-April 2015 plunge) would open doors for a rise to 50-DMA at 1.5235.

  • Overall, the pair is likely to continue its downward journey in the falling channel so long as it does not see a break above 1.5336.


EUR/USD Analysis: Spinning top at key resistance

EURUSD

The EUR/USD pair clocked an intraday high and low of 1.1048 and 1.0945 before ending the day moderately higher at 1.0991. The common currency was buoyed by ECB Draghi, who said, the European Central Bank should reach its inflation target "without undue delay" after easing its policy this month. The pair rose to a high of 1.1048, but failed to sustain above the 200-DMA at 1.1033 and dropped below 1.10. The currency pair is back to 1.1033 levels ahead of the Eurozone Zew survey and the German Zew survey figure.

Will the data matter a day before Fed?

The Eurozone and German Zew numbers may get little or no attention from the markets as investors remain focused on the Fed meeting. Meanwhile, the US CPI figure could have a say, especially if the core inflation ticks higher as expected. This could push up expectations of a slightly faster than expected tightening path and lead to USD rally. On the other hand, a weak core CPI could trigger USD weakness and help the EUR/USD break above the 200-DMA at 1.1033 on closing basis.

Technicals – Eyes 50-DMA support after spinning top formation

  • Euro’s rally from the bottom of 1.0517 has stalled at the 200-DMA since last 4 days. The currency has failed repeatedly to sustain above the rising trend line (drawn from March 13 low – April 13 low)

  • The pair also formed a spinning top formation, which indicates indecisiveness ahead of the FOMC rate decision.

  • Consequently, the odds of a break below 1.10 and a drop to 50-DMA at 1.0939 are high.

  • The short-term outlook could turn bullish only in case of a daily close above the 200-DMA.

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