GBP/USD Forecast: What's next after 5-day rally?

The GBP/USD pair ended higher at 1.4222 levels on Friday on the back of broad based USD selling triggered by weak US wage growth figures. The five-day winning streak was its first since June. The February payrolls report was much better-than-expected, but the details were not so impressive. The headline NFP pushed the three-month average lower to +228K from +241K, however, the average hourly earnings printed at -0.1% m/m and 2.2%; both missed estimates.

CME rate hike probability post Friday’s NFP

• The data shows markets expect another rate hike in September. A few days the probability of a 25bps rate hike in 2016 was well below 50%.

• Moreover, the improvement is largely in the light of financial market stability.

Hence, there is a scope for a recovery in the US dollar, especially since the UK side of the story is comparatively weak. Last week’s all three PMI figures in the UK – manufacturing, construction, and service – printed weaker-than-estimates.

The data calendar is light today. But buyers may remain on back foot today as the BoE Governor Mark Carney and Co, could show a greater willingness to further delay its normalization cycle during their speech on the UK’s EU-membership on March 8.

Technicals – Could re-test 5-DMA support

• Sterling’s overbought status (as per RSI) on the 4-hour chart could trigger a drop to immediate support of 1.4195 and drop to 1.4165 (rising trend line support on hourly chart + 23.6% of 1.5230-1.3835).

• Only a break below 1.4165 could see prices drop to 1.4123 (5-DMA) support.
  

• On the other hand, a rebound from 1.4165 followed by a break above 1.4210 could shift risk in favor of a rise to 1.4252 (50% of 1.4669-1.3835).

• Short-term bias stays bullish unless prices breach 1.4079 support on daily closing basis.

EUR/USD Analysis: Rising trend line resistance still intact

Euro settled the first week of March on a positive note on broad based USD selling and falling prospects of an aggressive ECB easing. MNI report on Friday showed policymakers are unlikely to do anything more than a 10 basis point rate hike. Furthermore, weak US wage growth figures led to a broad based USD sell-off in the NY session. The pair clocked a high of 1.1043 before profit taking led to a daily/weekly closing was at 1.1002.

All about ECB

The first four trading sessions will be all about ECB. A 10 basis point deposit rate cut is widely expected and already priced-in. The markets are now speculating about possible tweaks in the QE program - another six-month extension to the QE program and/or a variation on the collateral eligible under the purchase program and/or increase in the monthly QE purchases.

However, the probability of QE expansion or more than 10bps rate cut is falling fast. Still, EUR could take a hit if the talk of aggressive measures gathers traction ahead of the ECB rate decision. The data calendar is light today; hence, the spot is left at the mercy of overall demand for the USD and speculation surrounding ECB rate decision.

Technicals – Eyes 50% Fibo support

• Euro’s daily closing below rising trend line resistance support on the daily chart despite rally to near 200-DMA at 1.1045 in the NY session coupled with bearish daily RSI indicates the spot could test 1.0945 (50% of 1.0517-1.1376).

• A break lower would expose 1.09 handle.

• On the other hand, a failure to drop/sustain below 50-DMA at 1.0975 could see the pair rise to rising trend line resistance at 1.1010.

• The short-term outlook stays bearish unless 200-DMA resistance is breached on daily closing basis.