GBP/USD Forecast: Points northwards, Eyes UK manufacturing production data

The GBP/USD pair tracked the action in the equity markets throughout the data, while largely ignoring comments from BoE MPC member Cunliffe and a mixed UK trade deficit data.

Key take away from UK data releases yesterday

• The Office for National Statistics said Britain's total trade deficit widened to GBP 10.352 billion in the fourth quarter from GBP 8.575 billion in the previous quarter, marking the biggest trade gap since the start of 2015.

• Goods deficit for 2015 as a whole widened to GBP 125.028 billion from GBP 123.143 billion; the biggest on record.

• In December, the total trade deficit, including services, narrowed to GBP 2.709 billion from GBP 4.031 billion.

The fourth quarter figure clearly shows trade is likely to act as a drag on the economic growth. However, markets paid little attention to the weak data.

Eyes UK manufacturing production data

The manufacturing production could have remained subdued in December, given the weaker trade data in Q4. The PMI number also showed the activity remained subdued in December. However, the weaker data may not lead to a fresh sell-off in Sterling as – the slowdown is priced-in (after PMI release & during Dec-Jan fall) and a slightly weaker-than-expected figure may have little effect on Pound. On the other hand, a positive figure could help Sterling make gains, but the upside could be restricted if the risk-off tone in the equities worsens.

Technicals – Eyes rising trend line resistance at 1.4540

• Sterling’s three-day drop, followed by a positive candle and a daily close back above key level of 1.4445 indicates the bullish momentum could regain pace today and send the spot higher to 1.4516-1.4519 (23.6% of 1.5930-1.4079 + 38.2% of 1.5230-1.4079).

• A break above the same would expose 1.4540 (rising trend line resistance)

• On the other hand, an hourly close below 1.4420 (falling trend line support) could see the spot test 1.4360 levels.

EUR/USD Analysis: Hovers around key Fib, strong support at 1.1253

The EUR/USD pair rose to 1.1338 on the back of a heightened risk aversion in the early US session. The spot ignored lackluster German industrial production data. The bullish momentum ran out of steam and the pair fell back to trade around 1.1290 levels after the US equities regained poised and ended on a flat note. The risk-off seen in Asia ensured the pair stayed around 1.1290 levels.

Eyes Yellen testimony

Yellen is scheduled to testify on the economy before congressional committees today and tomorrow. Comments on whether the Fed will still be considering a rate hike at its March meeting is what markets would be interested in hearing. As per CME data, markets do not see the Fed moving rates in 2016. If Yellen plays down next rate hike move, then it would mean policymakers and the markets are now on the same page and thus USD could witness a sharp sell-off.

Technicals – Bearish RSI divergence on 4-hr chart

• The 4-hr chart shows a bearish price RSI divergence, which warrants caution on the part of the bulls so long as the pair stays below Monday’s high of 1.1338.

• A minor correction could stall around 1.1253 (100% Fibo expansion of Dec low – Dec high – Jan low)

• A break lower would expose critical support at 1.1236 (38.2% of Mar low-Aug high).

• On the higher side, resistance at 1.14 could be put to test if the spot takes out 1.1338.