GBP/USD forecast: Will it break below 1.4895?

The GBP/USD pair rose to 1.5098 after the Fed announced a 25bps hike in the interest rate as expected before ending the day lower at 1.4998 levels. A 25bps hike was accompanied by an upward revision of the 2016 GDP forecast and downward revision of the jobless estimate. The Fed; via its Dot Chart, also signaled that it intends to raise rates 4 times next year.

The overall policy statement and forward guidance on the interest rate was hawkish than expected and this may keep the USD bid heading into the year end. This is a bad news for Sterling as the odds of a BOE liftoff are falling each day on account of slowdown in the wage growth, the threat of job losses in mining and energy sector and worsening current account. Consequently, the Cable appears more likely to re-test 1.45 levels by March 2016.

Eyes UK retail sales data

The UK November retail sales figure, due today, should signal a resilient consumer spending. Only then, the able could manage to hold above 1.50. The retail sales growth in the annualised terms is seen slowing down to 3.0% from 3.8%. The annualised core figure is also expected to drop to 2.3% from 3.0%. Month-on-month, the headline figure is seen rebounding to positive territory. A better-than-expected number could help Sterling unwind its losses seen in Asia.

Technicals – Flirting with falling channel support

• Sterling’s turn lower from the 1.5240 marked the continuation of the lower highs formation on the daily chart.

• An intraday drop to 1.4895 cannot be ruled out today, but it would take a surprisingly weak UK retail sales number to ensure the pair witnesses a daily close below 1.4895, in which case, 1.4739 (Apr 1 low) could be tested.

• On the other hand, a rebound from the channel support and a break above 1.5 is likely to be followed by a rally to 1.5113 (23.6% of 1.5819-1.4895) in a next couple of days.

• A stronger than expected UK retail sales data could see the pair take out 1.5 today itself.

EUR/USD – History may not repeat itself due to hawkish Fed hike

As pointed out here (Macro Scan ), the EUR/USD pair rallied (2 out of 3 times) in last fed tightening cycles after the tightening began. However, the history may not repeat itself this time since the 25 basis point hike was accompanied by the upward revision of the 2016 GDP and employment forecasts. The Fed also pointed out to 4 rate hikes next year.

Overall, the Fed decision was slightly hawkish than expected. Consequently, we could see the EUR/USD pair move lower to 1.0748 (23.6% of 1.1495-1.0517) before the year end. In the past, the pair witnessed a rally after the tightening began. The only factor that could see the EUR/USD pair rally would be a correction in the stock markets.

Technicals – Eyes 23.6% fib support

• Euro’s repeated failure to take out 200-DMA and sustain above 1.10 handle followed by a drop below 1.0890 (38.2% of 1.1495-1.0517) indicates the currency pair is likely to test 1.0796 (Dec 7 low).

• A break lower would expose 1.0748 (23.6% of 1.1495-1.0517).

• On the other hand, an intraday recovery above 1.0890 would open doors for a rise to 1.0956 levels.

• The outlook stays bearish so long as the 200-DMA resistance stays intact.

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