GBP/USD Forecast: Eyes UK trade deficit, stuck between 200-DMA and 50-DMA

Sterling rose to a high of 1.5372 in early Europe before falling back below its 200-DMA and extending losses to 1.5261 levels before once again tuning higher in the NY session to trade above 200-DMA. the BOE voted 8-1 to keep the Bank rate unchanged at 0.5% and decided unanimously to leave the asset purchase program at 375B pound. The main takeaway was that policymakers now believe inflation could remain below 1% until the spring of 2016, which is longer than anticipated. BOE’s Carney was on the wires in NY session stating that the timing of the BOE rate hike does not depend on Fed’s liftoff.

UK Trade deficit on cards

The UK total trade deficit for August is seen contracting to GBP 10.00 billion from July’s GBP 11.082 billion. A fall in the trade deficit could see the GBP/USD pair take out weekly 50-MA resistance at 1.5380 and rise to 50-DMA located at 1.5421. However, a possibility of a spike in the trade deficit/sharp drop in the exports cannot be ruled out. The PMI numbers in July and August showed a drop in the new work and export orders. Furthermore, the sentiment had taken a turn for the worse in August on account of the turmoil in China. Thus, the prospects of a sharp drop in exports is high. In such case, the cable could fall back below 200-DMA to test 1.53 levels.

Technicals – Eyes 50-DMA

Sterling’s recover from 1.5261 to trade above the 200-DMA at 1.5318 in the NY session indicates the bullish momentum is gathering pace and the pair could rise to its 50-DMA located at 1.5421. The weekly 50-MA at 1.5380 could offer resistance, but, an hourly close above the same would open doors for 1.5421. On the lower side, a failure to take out 1.5380 could push the pair back to 1.5418. As mentioned in the previous day’s report, the 200-DMA has proved to be a good support, but not a strong resistance. Thus, the downside could be protected around 200-DMA.

EUR/USD Analysis: stuck between trendlines

The EUR ignored the dovish ECB accounts/minutes to print a high of 1.1327, before paring gains to end the day at 1.1275 levels. The pair confirmed a breach of the falling trend line (represented by the black line on the chart). Early in European session, Germany reported a significant deterioration in trade activity. Exports have dropped by the largest amount since 2009. Meanwhile, the ECB minutes expressed concerns about the economy and inflation.

Fed rate hike bets dropped after minutes

The latest CME fed watch data shows the probability of a 25 basis point rate hike at future Fed meetings dropped slightly after the release of the Fed minutes. A 25 bps rate hike probability in March 2016 stood at 43.6% ahead of the minutes, which now has dropped to 42.00%, while the probability of a status quo increased to 42.3% from 37.7%. On similar lines, the December rate hike bets dropped to 33.6% from 36.3%.

Moreover, the Fed failed to provide any clarity regarding the timing of the liftoff. So far the markets have stayed calm, however, the likelihood of the markets turning risk averse due to Fed’s confusing language are high. Any sign of a drop in crude prices could also spook markets and lead to strength in the safe haven and funding currencies. However, the EUR could underperform during risk-off as low crude would mean a drop in inflation and more easing in the ‘pipeline’.

Technicals – falling trend line breached, range for the day: 1.1252-1.1320

Euro breached the falling trendline on the daily chart on a closing basis, thereby opening doors for a re-test of the immediate resistance seen at 1.1320 (green line). On the lower side, the falling trendline could offer support around 1.1252 levels. Given the absence of a major market moving data, the pair is likely to remain stuck in the range of 1.1320-1.1252 today. Only a daily close above 1.1320 would mean the recovery from the March low has resumed and the pair could test 1.1460 (Sep 18 high) levels.