GBP/USD Forecast: Falling channel seen ahead of UK Trade deficit

The risk-off in the equity markets and the resulting drop in the UK Gilt yields pushed the GBP/USD pair to a low of 1.4351 (23.6% of 1.5230-1.4079), before a sudden rise in the USD selling interest saw the pair trim losses to end the day around 1.4429 levels. As of now, the spot is trading around 1.4410 levels.

Eyes UK trade deficit

UK trade deficit figure for December is due for release later today. Sterling’s sharp fall began in December, hence could result in an uptick in exports. However, if J-curve theory is anything to go by, then we may see a drop in exports and a spike in trade deficit. The trade deficit with non-EU nations is seen rising and that will not be good news for Sterling. Meanwhile, goods trade deficit is seen largely unchanged above GBP 10 billion.

A sharp rise in trade deficit could strengthen the offered tone around GBP. On the other hand, a sharp drop in the trade deficit is likely to strengthen Sterling. The move could be similar to the one we had seen after the release of an upbeat public sector net borrowing figure (along with horrible retail sales figure).

Apart from the data, the risk-off in equities would continue to weigh over sterling. The data may receive little/no attention from the traders if the risk-off is severe.

Technicals – Falling channel on the hourly, could re-test Monday’s low

• Sterling’s failure to take out 1.4443 (38.2% of 1.4079-1.4668) coupled with falling channel formation on the hourly and bearish hourly and daily RSI indicates the currency pair could revisit 1.4351 (Monday’s low + 23.6% of 1.5230-1.4079).

• On the other hand, a break above 1.4447 (falling channel resistance) could open doors for a re-test of 1.4476-1.45 levels.

• An hourly close below 1.4351 would mark a head and shoulder breakout; while a daily close above 1.4519 (38.2% of 1.5230-1.4079) could cheer the bulls.

EUR/USD Analysis: Rebounds from 50% Fib, offered again at 38.2% Fib

The EUR/USD pair fell to a low of 1.1088 (50% of Mar low-Aug high) despite the risk-off tone in the markets, before running into offers again around 1.1236 (38.2% of Mar low-Aug high) in Asian session today. The drop in the EUR was somewhat surprising as the common currency failed to strengthen despite the carry unwind amid risk aversion. Greek bond yields spiked again as there were reports that Greece bailout review stalled.

Focus on Greek bond yields

Greek issue is making a comeback again! The issue may flare up again; hence, traders should keep an eye on the Greek bond yields. A rise in the Greek bond yields is a red signal for the EUR bulls. In past we have seen, the Greek crisis news usually leads to rise in Greek and periphery bond yields along with a drop in core bond yields and a drop in the EUR. The rise in Greek yields could be an early sign of upcoming EUR weakness.

Domestic data – industrial production and trade balance – may be ignored if the markets get caught up between rising Greek yields and risk-off in the equities.

Technicals – Double top on the hourly chart?

• Euro’s failure to take out 1.1236 (38.2% of Mar low-Aug high) in Asia today has raised prospects of a double top formation with neckline support at 1.1088 (50% of Mar low-Aug high).

• A break below the immediate support of the hourly 50-MA at 1.1163 would shift risk in favor of a drop to the double top neckline at 1.1088.

• On the other side, a break above 1.1236 would mean the bullish move has resumed and the pair is heading to 1.13 levels.