GBP/USD Forecast: Stable for last 24 hours, scope for correction

A stable GBP/USD pair has become a rare sight since December, but the pair finally found some stability in the last 24 hours – stuck in a 100-pip range of 1.4120-1.4220. The drop in the UK unemployment rate and a slightly better-than-expected UK wage growth data coupled with a weak US CPI and housing starts figure opened doors for a much needed technical correction in the pair. The spot attempted a recovery but was rejected at the hourly 50-MA. As of now the pair is trading around 1.4175 levels.

Eyes ECB rate decision

No major UK or US data is due for release. Hence, the doors are open for a technical correction. The technical correction may gather speed if the ECB President hints at an expansion of the QE program/or another rate cut, driving the EUR/GBP cross lower. A sharp drop in the EUR/GBP could help the GBP/USD move higher.

GBP/USD Technical Levels

• The pair found bids again yesterday as it approached the falling channel support on the hourly chart.

• Sterling’s bounce from 1.4215 levels, coupled with the bullish Price-RSI divergence on the hourly chart indicates the currency could take out hourly 50-MA resistance of 1.4191 and head towards the falling channel resistance on the hourly chart at 1.4266.

• Caution is advised once the pair is around 1.4266, since the 5-DMA is at 1.4249. The pair has been repeatedly offered around 5-DMA in last one month or so. Hence, a daily close above 5-DMA could indicate a short-term trend reversal.

• On the other hand, a failure to take out/sustain above the hourly 50-MA could see the pair revisit previous day’s low of 1.4125.

EUR/USD Analysis: ready for a bullish move, but there is ECB ahead

The EUR/USD pair formed a bearish inverted hammer formation on the daily chart yesterday. The pair ran into offers again as it neared 1.0974 (38.2% of 1.1714-1.0517). The bearish move was quite surprising since the US data was weak, while the equity markets across the globe traded in the red. The Today, the Asian equities suffered losses again and that appears to have supported the pair, which is now trading slightly higher around 1.0890 levels.

ECB may disappoint

No one expects the ECB to tweak its monetary policy today. However, there is a consensus in the market that Draghi is likely to remind markets that the bank stands ready to cut rates further or expand QE in order to achieve price stability. Many in the market also expect Draghi to hint at a possible action in March as slide in oil prices is likely to push inflation lower. Yesterday’s drop in the EUR/USD despite weak US data and risk averse markets indicates the markets priced-in Draghi’s dovish tone.

However, there is a possibility that the ECB may disappoint in a sense that Draghi may not go any further than the routine dovish commentary – bank stands ready to do more (QE or rate cuts).

By now, it is quite clear that central banks are unable to fight oil driven low inflation. Hence, the ECB may throw in a towel in its fight against oil driven low inflation (by not hinting at more easing in March), the way BOJ did in Q4 2015. In this case, the EUR/USD pair would quickly recover from a minor hiccup and head higher towards its 200-DMA at 1.1048.

Technicals – Ready for a bullish move

• Euro’s sharp recovery from 1.0517 followed by a falling channel and bullish break from the same indicates the currency is ready to test the 200-DMA at 1.1048.

• Euro’s bounce from the falling channel support today has increased the likelihood of a move higher to 1.0974 (38.2% of 1.1714-1.0517). A break higher would expose the 200-DMA.

• On the other hand, a failure to sustain above the falling channel support could see the pair drop sharply to 50-DMA at 1.0813. The bullish outlook is at a risk of a daily closing below 50-DMA.