GBP/USD Forecast: Watch out for USD recovery

The GBP/USD pair rose to a high of 1.4578 before trimming gains on account of the risk-off in the equities. The spot closed at 1.4522; up for the second day. A weaker-than-expected UK manufacturing production figure failed to have any impact as expected, since the slowdown was already priced-in.

Key takeaways from Yellen testimony

• Fed is watching financial markets, feels equity sell-off and USD strength could hurt US economy

• May cut rates if required, but as of now feels the tightening could proceed; albeit at a slower rate than expected earlier

• Feels reasons for drop in inflation expectations are transitory, sustained labor market gains to push inflation closer to Fed’s target

• Fed is more concerned about the instability in commodity exporting nations and not worried about slide in Yuan · Is unsure if implementing negative rates is legal

The spot managed to clock a high of 1.4578 largely due to talk of rate cut. However, what is worth noting is that Yellen; despite slowdown in the economy, financial market turmoil; did not back-off entirely from policy tightening. Fed I still considering at least 1 if not 2 rate hikes this year. And we may see more rate hikes as well if the economy and global markets see a turnaround.

Hence, the overall tone was slightly less dovish than expected. Thus, we may see USD recover yesterday’s losses today.

Technicals – Now moving in a rising channel

• The hourly chart shows Sterling is now moving in a rising channel.

• The bullish momentum ran out of steam in Asia as it approached NY session high of 1.4578. This followed by a drop below 1.4519-1.4516 (23.6% of 38.2% of 1.5230-1.4079 + 1.5930-1.4079) would mean the bears have regained control and the pair is heading towards 10-DMA at 1.4472.

• On the higher side, a break above 1.4578 (previous day’s high) would shift risk in favor of a rise to 1.4630 (rising channel resistance on the hourly chart).

EUR/USD Analysis: Increased odds of a bearish move, dragonfly doji on daily charts

The EUR/USD pair fell to a low of 1.1160, before recovering entire losses to end the day largely unchanged at 1.1288 levels. The move resulted in a formation of a bearish dragon fly candle stick formation on the daily chart; which indicates trend reversal.

As discussed above the odds of a rebound in the US dollar are high as well. Hence, the spot could head lower as long as we do not see a ‘major’ risk aversion in the European equities. ‘Major’ mean a drop of more than 1.5%. These days a drop of 1% or so has become a regular feature and thus should not result in a sharp uptick in the EUR/USD pair.

Technicals – strong resistance at 1.1320

• Euro’s bearish RSI divergence on the hourly chart, coupled with a bearish dragon fly formation on the daily chart indicates the bullish momentum may have run out of steam.

• A failure to take out 1.1320 (rising trend line resistance on the hourly) could see the pair drop to immediate support at 1.1236 (38.2% of Mar low-Aug high + rising trend line (blue) support).

• On the other hand, an hourly close above 1.1320 would shift risk in favor of a rise to 1.1387 (Oct 20 high).