The GBP/USD pair rose to its 200-DMA at 1.5319 on Wednesday after the UK industrial production for August beat the expectations by a wide margin. Immediately after the release of the data, the pair spiked to 1.5310 levels. However, we did not see a strong second wave of buying in the GBP, which is usually seen post an upbeat UK data. The pair did clock an intraday high of 1.5339 in the NY session before falling back to 1.5316 at NY close.
BOE minutes to carry a more cautious tone
The Bank of England is widely expected to keep the key policy instruments unchanged. The vote split is also widely expected to remain unchanged at 8-1. However, the minutes are likely to carry a cautious tone due to a sharp drop in the Fed rate hike bets, increasing probability of more ECB QE and global/China, the EM slowdown. The slowdown in the service sector highlighted by the UK PMI is also a concern for the BOE. Overall, this could be a non-event for the markets. A major surprise would be a change in the vote split – 7-2 or 9-0. The likelihood of more policy members voting for a rate hike is low, hence, a surprise may come in the form of a unanimous (9-0) vote to keep rates unchanged. Sterling could take a beating across the board in this case.
Technicals – 200-DMA is a weak resistance, but a strong support
The daily chart shows the pair has taken out 200-DMA resistance in one attempt since May, although the same has acted as good support. Furthermore, the swings in the GBP/USD pair have been quite wild – 500 to 600 pips. Given the pair has just bottomed out from the 10-day losing streak, it is quite possible that the 200-DMA seen today at 1.5318 is quickly taken out. A 500-pip swing from the latest cyclical low of 1.5107 means doors are open for an upside target of 1.5530 (falling trendline seen on the daily).
On the lower side, a failure to see an hourly close above 200-DMA could lead to sideways action followed by a slide to 1.5248 (50% of Apr-Jun rally).
EUR/USD – ECB accounts could drive EUR lower
The EUR/USD pair rose to a high of 1.1284 in Asia on Wednesday before falling to 1.1212 in European morning after data showed German industrial output contracted. Later, the common currency continued to move in a volatile fashion against the usd in NY afternoon.
Fed minutes – Confuse if cannot convince
The Fed minutes for the September 17 meeting are likely to carry the usual ‘Ifs and Buts’ and confusing words – “some policymakers and many policymakers” and are likely to avoid giving a clear hint at a possible timing of the rate hike. The global slowdown, threat in China are likely to be blamed for the delay in the liftoff. The minutes would also show the policymakers need “some more improvement in the labor market” before the rates could be moved.
The “confuse if cannot convince” tone of the minutes is likely to be read as dovish. Consequently, that would bring the ECB further close to expanding/front loading its QE program. The ECB minutes due ahead of the Fed minutes are likely to stress the bank’s readiness to do more and thus, cap gains in the EUR/USD (arising out of dovish Fed minutes).
Technicals – Symmetrical Triangle on the daily
Euro is awaiting a breakout from the symmetrical triangle formation on the daily chart. An upside breakout could immediately run out of steam at trend line resistance (green line) around 1.1330. An hourly close above 1.1330 could open doors for 1.1460 (Sep 18 high). On the other side, support is seen at 1.1148 (200-DMA and symmetrical triangle support). A break below the same could push the pair down to 1.1017 (Aug 18 low).