GBP/USD Forecast: GBP under pressure as the FOMC minutes could reinforce rate hike bets

The GBP/USD turned higher from the low of 1.5154 after the data in the UK showed the core inflation ticked higher in October. The spot rose back to 1.52 in early US session and clocked a high of 1.5238 before falling back to 1.52 levels in Asia today.

FOMC minutes to boost Dec rate hike bets

The Dec rate hike probability (25 bps move) has cooled slightly to 63.9% from the post-NFP level of 70%. The drop could be due to expectations of a slower than normal liftoff – less than 25 bps rate hike.

The FOMC minutes of the October meeting due for release in the NY session could boost the December rate hike bets, which currently stand at 63.9%. The markets believe the December liftoff is a done deal and the minutes could confirm the same. The overall tone is likely to point at a liftoff in December, but may also trigger fresh debate over whether the rate hike would be 25bps or less than 25bps. In any case, the USD stands to gain or at least stay on a strong footing ahead of the Dec 17 fed meeting.

Still, it is worth noting that the long USD is the most crowded trade in the city right now and we may be in for a surprise as the markets may ditch USD on “buy the rumor, sell the fact trade” if the minutes confirm liftoff in December. The immediate reaction would be USD bullish and may last day or two before profit taking sets-in.

Meanwhile, BOE’s Broadbent’s speech in the European session is unlikely to have a major impact on the GBP/USD pair.

Technicals – Eyes break above 1.5248

Sterling’s recovery from the low of 1.5027 followed by sideways action around 1.52 and sharp recovery from the low of 1.5154 to 1.5210 yesterday indicates the currency is likely to see a break above 1.5248 (50% of Apr-Jun rally). In such case, the doors will be open for a re-test of 1.53. On the other hand, another failure to take out 1.5248 could reinforce bulls and shift risk in favour of a re-test of 1.51 handle.

EUR/USD Analysis: Oversold RSI, Eyes hourly 50-MA ahead of FOMC minutes

The EUR/USD pair fell to 1.0630; its 7-month low; as the increased odds of Fed tightening and the prospects of more ECB action in December continues to weigh over the common currency. The rise in the USD funding cost is also weighing over the EUR.

Eyes FOMC minutes

Markets believe the Fed December rate hike is a done deal, although the size of the lift-off is still a matter of debate. The equity markets are quite stable, while the treasury volatility has dipped to a year low. The China-led panic has calmed for now and the US labor market is on fire. Consequently, there is very little for the Fed to worry about. Hence, the doors are wide open for the EUR/USD sell-off to continue.

However, it is worth noting that EUR/USD short is the overcrowded trade and it is also driving investors to hold long USD against other majors. In case, the Fed minutes confirm Dec rate hike there is a possibility of an immediate spike in the USD, followed by a “buy the rumor,Sell the fact” trade – which means USD could be sold on confirmation of a Dec rate hike.

Technicals- Oversold?

A 900-pip fall in last one month or so has left the currency pair oversold. The 4-hr and the hourly chart shows the currency pair’s lower high lower low formation since Nov 6 is accompanied by a higher lows and higher highs on the RSI. Thus, we may see the pair re-test the hourly 50-MA 1.0726 levels. In case, the FOMC minutes confirm Dec rate hike, the pair could drop sharply to 1.0580 followed by a recovery in the next few days to 1.08 levels.