The USD made a sharp comeback in the NY session on Friday; courtesy of which the GBP/USD pair fell to 1.5187 levels. The weak close marked the continuation of the “lower highs and lower lows” formation/falling channel formation seen on the daily chart.
Fed normalization begins today?
The closed meeting of the Board of Governors of the Federal Reserve System is scheduled today and the only matter under consideration is “Review and determination by the Board of Governors of the advance and discount rates to be charged by the Federal Reserve Banks.”
USD could rally on a discount rate hike
The discount rate (rate at which the commercial banks borrow money from the Fed. It is not really a discount rate, but a premium over the Fed funds rate) hike was discussed in a similar closed meeting held in September, where 8 of the 12 regional Fed banks called for a discount rate hike. The number could strengthen further in favour of a discount rate hike to near unanimous levels today.
It would be a sign that the normalization process has begun and the Fed is set to hike rates at the Dec 16 meeting. This could trigger a last led upwards in the USD index. It means the GBP/USD pair could extend losses to 1.5087 (61.8% of Apr-Jun rally).
Technicals – Eyes 1.4980
Sterling’s fall on Friday marked a continuation of the lower highs pattern seen on the daily chart since late August. The turn lower was once again triggered after a failure to sustain above the 61.8% of the previous fall; in this case 1.5497-1.5027. The daily RSI has failed to rise above 50.00 and once again turned lower. Overall, the chart says the pair is likely to extend losses to 1.4980-1.4960 (falling channel support). The pair may not find much support at 1.5087 (61.8% of Apr-Jun rally), given the bearish formation on the daily chart. On the higher side, only a daily close 1.5248 (50% of Apr-Jun rally) could see bulls make a comeback and shift risk in favour of a rise to 1.5338 (200-DMA).
EUR/USD Analysis: Eyes Fed’s decision on discount rate
The EUR/USD pair fell on Friday to 1.0640 and extended losses to 1.06 in Asia as Draghi stressed on readiness to do more in order to counter low inflation and faltering Eurozone economic recovery. His comments pushed the German 2-yr yield to a fresh record low. The odds of a ECB announcing more stimulus at the Dec 3rd meeting increased further at a time when the Fed is widely expected to raise rates.
Focus on German data and Fed meeting
From now till Dec 3rd, any German/EZ data if weaker-than-expected, would only add to the bearish pressure on the EUR, since it would confirm Draghi’s view of a faltering economic recovery. On the other hand, a better-than-expected data may lead to a minor technical recovery. However, such a move would also depend on the reaction in the equity markets. In case, the equities cheer the positive Eurozone data, the EUR may not be able to see even the minor corrective rallies.
However, all the scenarios of the Eurozone data and its impact on the EUR could take a back seat in case the Fed raises the discount rate today. It would be a sign that the normalization process has begun and would be a ready by the markets as the Fed pre-committing to a liftoff in December. Consequently, the EUR and other major would take a hit against the USD.
Technicals – Bearish below 1.0616
Euro’s failure to sustain above the 4-hour 50-MA on Friday, followed by a sharp drop to 1.06 keeps the odds in favour of a drop to 1.0587 (trend line support – Nov 6 low-Nov 18 low). An hourly close below 1.0587 would open doors for a drop to 1.0463 (yearly low).
However, the RSI is oversold and continues to form higher lows as compared to the lower lows formation on the price chart. Consequently, a technical correction could to the 4-hour 50-MA at 1.07 cannot be ruled out.