The GBP/USD pair fell to a low of 1.5025 on Friday after the US non-farm payrolls report blew past expectations to print at 271K, pushing the unemployment rate dropped to 5.0%. The CME Fed fund futures now show the December rate hike probability at 69.8%. The 2-yr treasury yield, which mimics rate hike bets, rose to its highest since 2010. The cable witnessed a moderate technical recovery in Asia and is approaching 1.5087 (61.8% of Apr-Jun rally).
Fresh weakness in European session
The rate hike bets spiked across the board following the stellar non-farm payrolls report. What is worth noting is the 32.5% probability of a move in the fed funds rate to 0.75% at March 16 Fed meeting.
The demand for the US dollar could spike once again in the European session as the data calendar is empty and in such cases the markets are more likely to extend the post-NFP movies; in this case it is the US dollar rally. The spot could begin its journey back to 1.5024 (falling channel support). Weakness in the European equities (due to increased possibility of a Fed rate hike) could add to bearish pressure on Sterling and other risk assets.
Technicals – Daily RSI still not oversold
Sterling’s sharp fall pushed the RSI on the hourly and 4-hour chart to oversold territory, thereby opening doors for a correction seen in Asia. However, gains could be capped around 1.5087 (61.8% of Apr-Jun rally) as the daily RSI has still not hit the oversold region. Hence, a drop to 1.5025 (falling channel support) appears possible today. A daily close below 1.5025 would reinforce bears. In case, the pair breaks above 1.5087 could open doors for 1.5163 (Sep 4 low). However, reversals from the data driven downtrend are usually seen after the RSI divergence on the 4-hour or daily charts and that is yet to happen.
EUR/USD Analysis: Could find support in weak equities
The EUR/USD pair fell like a rock to a low of 1.0705 levels on Friday after the US non-farm payrolls pretty much cemented the December Fed rate hike bets. The data further highlighted the divergent monetary policy path adopted by the Fed and the ECB. At the moment, the currency pair is trading around 1.0770.
Fed rate hike bets could hurt risk assets
As said earlier, increased probability of a Fed rate hike is bearish for the EUR, however, a possible risk aversion in the equities could offer support to the shared currency. The equities across Europe and in the US could witness correction as Fed prepares for a rate hike in December. Consequently, the EUR’s funding currency status could come-in to play, helping it regain composure; especially against Sterling and commodity dollars – AUD, NZD, CAD.
German trade balance figures could rattle markets as well, in case the exports drop again highlighting the economy’s vulnerability to the slowdown in China. Again a weak German export data could rattle equity markets and lead to EUR strength.
Technicals – Gains capped around 1.0819
Euro’s weekly close below 1.0758 (76.4% of Mar to Aug) has opened doors for a drop to 1.05 levels. But, the oversold RSI on the hourly and 4-hour chart could trigger a technical correction in the pair. The immediate gains appear capped around 1.0819 (May 27 low). On the downside, 1.0713 (Mar 31 low) could offer support. A failure to take out 1.0819 could be followed by a break below 1.0713 and a drop to 1.0660 (Apr 21 low).