The GBP/USD pair rallied to a high of 1.5467 on Friday on the back of a broad based weakness in the USD. The weaker-than-expected US personal spending and income data led to profit taking on the USD longs ahead of the weekend and month-end closing.
Focus on UK PMI and US ISM manufacturing
The UK October final manufacturing PMI could become a reason for further rally in the GBP/USD pair in case the headline figure stays around or manages to print higher than the previous figure of 51.5. The details of the report could throw a light on how the new export orders have reacted to fresh drop in the EUR/GBP pair following ECB’s hint at more easing in December. Sterling strength is hurting export activity and is also responsible for the disinflationary effect. An upbeat headline figure, but a sharp drop in the new export orders index could cap gains in Sterling.
Later in the day, the US ISM manufacturing figure would be watched out by the markets. More than the headline figure, the traders are likely to take cues from the employment sub index. Sustained growth in manufacturing sector employment could push up 2-yr treasury yield and lead to USD strength.
Technicals – Falling channel breached on the upside
Sterling’s close at 1.5421 on Friday confirmed the upside breakout from the falling channel seen on the daily chart. It also marked a daily close above 1.5409 (38.2% of Apr-Jun rally). However, 100-DMA has acted as a stiff resistance since Oct 14 to Oct 22, thus, bulls are likely to wait for a daily close above the same. Nevertheless, the pair could test 1.5477 (100-DMA) – 1.55 today, in case it manages to hold above 1.5409 in early European session. On the other hand, an hourly close below 1.5409 could increase the risk in favour of sell-off to 1.5383 (trend line support).
EUR/USD Analysis: Re-test of 50% Fib amid weak stock markets
The EUR/USD pair spiked to an intraday high of 1.1072 on Friday as the release of downbeat US economic reports triggered a profit taking on the Fed-driven USD longs ahead of the month-end closing. However, the gains above 1.10 were quickly erased and the pair ended last week and the last month at 1.10 levels.
Focus on EZ PMIs and stock markets
An improvement in the Eurozone final manufacturing PMI for October can be expected after the ECB President Draghi hinted at more easing in December. Markets would be more interested to see if the German activity held up well amid increasing signs of a slowdown in China.
The action in the equity markets could have more influence on the EUR/USD pair than the domestic data. The Asian equities turned risk averse today after the Caixin China manufacturing, purchasing managers index, marked the eighth-straight month of contraction. An official gauge of Chinese factory activity contracted unexpectedly in October. The weak data is likely to keep Germany’s DAX weak. The mining heavy UK’s FTSE is also expected to suffer losses. Consequently, the EUR/USD pair could make another attempt at 1.1088 (50% of Mar-Aug rally).
Technicals – Recovery on bullish RSI divergence continues
The technical correction triggered by bullish RSI divergence on the 4-hr chart is likely to continue today. Euro could make another attempt at 1.1088 (50% of Mar-Aug rally) once the immediate resistance at 1.1040 is taken out. A break above 1.1088 would expose 1.11 (rising trend line resistance). Only a daily close above the same would mean short-term bullishness. On the other hand, a failure to sustain above 1.10 may lead to a sell-off to sub 1.09 levels.
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