GBP/USD Forecast: Trading the UK retail sales report

The GBP/USD pair recovered from the dip to 1.4256 in early Europe yesterday and rose to 1.4394 (hourly 100-MA) before falling back to 1.4313 levels in the Asian session today. No major data was released in US or UK. Still, Pound turned out to be one of the better performers after BOE Cunliffe said there’s no reason for the central bank to change its stance on rates. The statement sounded hawkish to the markets amid the new normal of negative rates and given the interest rate markets are indicating a rate cut in next six months.

Eyes UK retail sales report

The odds of a better-than-expected figure are high as –

• As per British Retail Consortium (BRC) data, retail spending increased 3.3% in January compared with a year ago, up from a 1.0% rise in December.

• BRC data also showed prices fell slightly less sharply last month mainly due to rise in food inflation.

A better-than-expected figure could send Sterling above its hourly 200-MA 1.4419. However, holding above 1.4419 would require additional support from the (positive action) in risk assets.

Cable may price-in a rebound in retail sales as expected by moving higher to around 1.4375 levels ahead of the data and hence, we could see a bout of profit taking if the actual figure matches estimates or is lower than estimates.

Meanwhile, a surprisingly weak figure could set the tone for a fresh sell-off towards 1.4250-1.42 levels.

UK public sector borrowing due for release as well

UK public sector net borrowing may not receive much attention from the markets, unless the number sees a significant drop. Last month, Sterling was extremely oversold and hence markets found a trigger to unwind shorts in the form of upbeat public sector net borrowing figure (even though retail sales figure was horrible).

EU meeting on Brexit

Outcome of the EU meeting on the UK membership in the Eurozone could decide the fate of the UK’s membership ahead of the referendum. Donald Tusk, the president of the European Council, hinted that on the big issues there remained considerable distance between all sides. A positive outcome would bode well for Sterling, as it would mean the BOE no longer faces Brexit uncertainty and may think about raising rates if the incoming data is strong.

Technicals – Falling channel on 4-hr chart

• Sterling’s failure to sustain above 1.4351 (23.6% of 1.5230-1.4079) on Thursday if followed by a break below rising trend line support at 1.4290 today could push the spot lower to 1.4210 (falling channel support).

• A minor uptick to 1.4375 cannot be ruled out since the spot is finding support at the larger rising trend line. A break above 1.4375 could see the spot test hourly 200-MA at 1.4419.

• Only a break above 1.4578 would mean the recovery from 1.4079 has resumed.

EUR/USD Analysis: Eyes EU meeting and US CPI

The EUR/USD fell to a low of 1.1071 on Thursday, before ending the day at 1.1106 levels. The rally in oil prices and an uptick in the equities kept the funding currency EUR under pressure. However, the oil prices surrendered gains in the NY session, which helped the common currency recover above 1.11 handle and move to 1.1125 levels in Asia today.

EUR/GBP under focus after EU meting

A positive (pro-EU) outcome of the EU meeting on Brexit today could trigger broad based rally in GBP. An ensuing sell-off in EUR/GBP could drive EUR/USD pair lower as well. An exact opposite market reaction could be seen if the EU meeting ends on a sour note.

Eyes US core CPI

An uptick in the core CPI could push EUR/USD below yesterday’s low. The headline figure is seen contracting 0.1% m/m. However, that is likely to be due to a sharp fall in energy prices. Ex food and Energy i.e. core CPI is seen rising 0.2% m/m from December figure of 0.1%. The markets are optimistic about a joint OPEC and non-OPEC action and have responded by sending risk assets higher this week. When viewed in this light, a drop in the headline figure may not be able to do any damage to the USD bulls. It will be the core inflation that could hurt USD if it prints below the December figure.

Technicals – Will it form Head and Shoulder?

• Euro’s turnaround from 1.1071 followed by a break above 1.11 handle has increase the odds of a break above the hourly 50-MA at 1.1126.

• If taken out, the spot could head towards 1.1210 (hourly 200-MA), given the hourly RSI has already turned positive. A failure to take out hourly 200-MA could trigger a renewed sell-off, leading to a head and shoulder formation with neckline support at 1.1068.

• Meanwhile, a failure to take out hourly 50-MA at 1.11136 followed by a break below 1.1071 would open doors for a drop to 1.10 handle.