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GBP/USD forecast: Weak UK wages could kill Sterling

GBPUSD

The sell-off in Sterling was one of the main story in the FX markets on Tuesday. A surprising negative inflation number in the UK, coupled with a drop in the core inflation saw the GBP/USD pair drop to 1.5248, where it consolidated for an hour or so before extending the drop to 1.52 levels on the back of dovish comments from BOE’s McCafferty. But profit taking and speculation of uptick in the UK monthly wages pushed the pair back to 1.5280 levels in Asia today.

Weak wages could spell disaster for Sterling

The UK wage growth data could turn out to be a make or break number for Sterling. Low inflation, slowdown in the activity, global risks, high trade deficit, dovish Fed and ECB are all pointing to a delay in the BOE rate hike. The only factor, which BOE’s Carney too reiterates time and again, is the rise in the wages. If the wage growth accelerates as per forecasts, then Sterling could re-test the area around 1.5360.

However, the odds of a weak number are high, given the economic activity has slowed down recently. In this case, Sterling is likely to take out 1.52 levels to test 1.5163 (Sep 4 low). The fall in the GBP/USD could turn out to be on of the biggest in case the weak UK wage data is accompanied by a strong US monthly advance retail sales report, due later in the day.

Technicals – Eyes 23.6% retracement support

Sterling’s repeated failure to close above 1.5360 (76.4% Fib expansion of Jun high-July low-Aug high), followed by a break below 1.5248 (50% of Apr-Jun rally) indicates a short-term could be in place at 1.5387 and the pair could drop to 1.5185 (23.6% of Jul 14-Apr 15 plunge). On the other side, a break above 200-DMA could open doors for a re-test of 1.5360-1.5387. However, buying interest could catch fire only if the daily close today is above 1.5387.

EUR/USD Analysis: Supported by risk aversion, Eyes US retail sales

EURUSD

The EUR/USD rose to an intraday high of 1.1411 despite weak German data. The German ZEW survey fell sharply in October, reflecting deterioration in investor sentiment. The drop was anticipated given the dismal economic figures out of German offlate. Moreover, Europe’s exposure to China an the resulting risk aversion in the markets yesterday kept the EUR on a strong footing.

Focus on US retail sales figure

The advance retail sales figure in the US is the second most important piece of data after non-farm payrolls. The domestic consumption needs to spike if the Fed wants to raise rates, more so, because the resulting rise in the USD in anticipation of rate rise could kill the already weak exports amid aggregate demand deficiency in the global economy. However, so far, the domestic consumption has stayed anaemic.

A 25 bps rate hike is not expected in 2015. The probability of the same is seen in March 2016. In case, the retail sales contract, the March Fed rate hike bets could go out of the window and lead to USD weakness against EUR (funding currency) and safe havens – JPY, CHF. However, the USD still would remain strong against risk assets due to the safe haven appeal of the treasuries.

Technicals – Bullish momentum seen above 1.14

Euro remains firmly in the grip of bulls, although the EUR/USD pair lacks momentum to take out 1.14 and head towards 1.1460. The spot has failed for two consecutive sessions to sustain above 1.14, leaving it exposed to a bout of profit taking in case it fails again near 1.14. The downside appears capped around 1.1318 (red trendline support on the chart), while an hourly close above 1.14 could be enough to push the pair to 1.1460.

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