GBP/USD Forecast: G-20 calls Brexit a global risk & Bullish RSI divergence could trigger relief rally

The GBP/USD dropped to a low of 1.3873 on Friday after a sharp upward revision in the US Q4 GDP coupled with a rise in Us personal spending and core personal consumption expenditure gave USD bulls reason to be optimistic on the overall health of the economy. The data was strong enough to push GBP/USD lower from near 1.40 levels to 1.3873 levels. String of US data released last week was better-than-expected and should calm market nerves about a possible recession in the US. This should keep USD demand intact; however, the UK side of the story could come into play and help the pair witness a relief rally.

G-20 is a global risk

The sharp drop in Sterling over the last two months has left the currency pair oversold and vulnerable to short squeeze. G-20 leaders came out again Brexit by stating it would be a global shock.

“Downside risks and vulnerabilities have risen, against the backdrop of volatile capital flows, a large drop of commodity prices, escalated geopolitical tensions, the shock of a potential UK exit from the European Union and a large and increasing number of refugees in some regions,” they said in a joint communique at the end of a two-day G20 meeting in Shanghai on Saturday.

The G-20 communique could help Sterling recover losses over this week. An upbeat domestic data released last week was largely ignored and that could come into play this week. Though Brexit saga is far from over, the frenzied sell-off may be done for now.

Technicals – Bullish RSI divergence, eyes 1.3924

• Sterling’s sharp drop over the last two months has led to oversold conditions, with hourly RSI and 4 hour RSI indicating a bullish divergence with price.

•  Hence, the spot could test resistance at 1.3924 (76.4% Fibo expansion of July 2014 high-April 2015 low-June 2015 high).

•  A break higher would expose 5-DMA at 1.40.

• On the other hand, a break below 1.3841 (daily low) would mean the bullish price-RSI divergence failed and the pair could be heading lower to a major support at 1.3654(Mar 2009 low).

EUR/USD: Rising trend line breached

The broad based USD demand following a strong GDP and personal spending report release, pushed the EUR/USD pair to 1.0912 levels on Friday. The losses were extended further to 1.0908 levels in Asia today, before the bid tone around EUR improved on account of losses in equities. The spot now trades around 1.0945 levels.

Eyes Eurozone CPI

The preliminary Eurozone CPI is expected to show the cost of living dipped further in Eurozone. Following Germany’s weaker-than-expected CPI reading, the odds of a drop in Eurozone CPI have increased. A weaker headline and core inflation figure could add to speculation that ECB would have to do more than what was expected till today and that could weigh over EUR.

The bank is widely expected to cut rates by another 10 bps and increase QE size by EUR 10-30 billion next week. Any bounce in the EUR/USD (possible only due to weak stocks/risk-off) could be sold into in anticipation of ultra dovish ECB next week.

Technicals – Strong resistance at 1.0975

• Euro’s repeated failure to take out 200-DMA finally translated into a sell-off that took the pair below the rising trend line support on daily closing basis.
• The daily RSI has turned bearish as well following Friday’s fall.
  
• A minor bullish price-RSI divergence on the hourly chart might come into play and help the pair recover, however, only a daily close above 1.0975 (50-DMA + rising trend line resistance) could increase the odds of a further gains.
• A failure to take out 1.0975, followed by a dip below Friday’s low of 1.0912 would open doors for a bearish daily closing below 1.0878.