GBP/USD Forecast: Fed not seen raising rates this year, will USD sell-off resume?

The GBP/USD pair fell to a session low of 1.4452 levels on Friday, before recovering slightly to end the day around 1.4498 levels. The greenback strengthened across the board after the data in the US on Friday showed a surprise drop in the unemployment rate and rise in the average hourly earnings. Both data sets were enough to overshadow the horribly weak payrolls figure.

Non-farm payroll report showed 151k growth in job market in January, lower than expectation of 192k. Prior month's figure was also revised down from 292k to 262k. Unemployment rate dropped to 4.9% versus expectation of 5.0% and that was also the lowest level since February 2008. Average hourly earnings rose an impressive 0.5% mom versus expectation of 0.3% mom.

Fed still not expected to raise rates this year

The table clearly shows the rate hike bets have not improved much. March rate hike bets are unchanged at 8%. Further down the road, the rate hike bets have ticked up slightly, but overall the probability is still low.

A minor uptick in the rate hike bets is obviously due to uptick in the wages. However, those could be erased quickly if the upcoming macro data disappoints.
Hence, the USD strength witnessed on Friday could be short lived. Moreover, the dollar strength on Friday may have been due to profit taking on the USD shorts ahead of the weekend. Still, if the risk-off takes control of the markets, the British Pound may not be able to do much.

Technicals – Flirting with falling trend line resistance

• Sterling’s failure to take out the falling trend line resistance (red) on the hourly chart, which is also a confluence of the Fibo levels - 1.4519-1.4516 (38.2% of 1.5230-1.4079 + 23.6% of 1.5930-1.4079) – could see the pair break below 1.4480 (daily low) and drop to 1.4443 (38.2% of 1.4079-1.4668).

• The odds of a drop to 1.4443 are high, given the RSI has again turned bearish on intraday charts

• On the other hand, a break above the falling trend line resistance could see the pair test 1.4563 (resistance on hourly chart). A break higher would expose rising trend line resistance currently seen at 1.4641.

EUR/USD Analysis: Watch out for rebound from trend line support

The drop in the EUR/USD pair could turn out to be short lived as discussed above. Unlike GBP, the common currency could be buoyed further by a return of risk-off. Hence, bears should remain cautious, especially since the pair is trading close to the trend line support.

Technicals – trend line support around 1.1105

• Euro’s repeated failure to take out 1.1236 (38.2% of Mar low-Aug high), led to a drop on Friday, but the downside was restricted at the rising trendline support.

• The hourly chart shows a minor head and shoulder with neckline support at 1.1130. A break lower would expose 1.1070.

• However, the bearish break could be a ‘fakeout’ as the pair could rebound from the rising trend line support seen around 1.1105 levels.

• A rebound could see the pair test hourly 50-MA at 1.1171, which if taken out, shall open doors for a re-test of 1.12-1.1236 (38.2% of Mar low-Aug high).