GBP/USD, EUR/USD Forecast: Two trades to watch 160926

GBP/USD unchanged after UK inflation rises and ahead of the Fed rate decision

GBP/USD is unchanged despite U.S. dollar weakness ahead of today's FOMC rate decision and as the market weighs up the latest UK inflation data ahead of tomorrow's BoE rate decision.

UK inflation climbed for a second straight month, rising to 3.1% year on year in August, the highest since March, and up from 2.9% in July. The increase was in line with expectations and driven by higher prices at the pumps amid the ongoing war in Iran and rising airfares.

Service sector inflation, an indicator of domestic pressures, remained unchanged at 3.4%, whilst core inflation was also unchanged at 2.6%.

The pound was little changed following the data, and expectations surrounding BoE rate hikes remain unchanged, with the market seeing four rate hikes across the coming 12 months.

The BoE meets this week and is expected to leave rates unchanged, as a weak labour market has helped to contain price pressures.

However, this stance is becoming increasingly difficult to maintain, particularly as UK drivers face the most expensive petrol costs since 2022. BoE Governor Andrew Bailey also warned that new risks are coming into play, such as rising food prices from challenging domestic weather and the impact of Super El Niño.

Meanwhile, the U.S. dollar is pausing around a two-week high after reaching a two-week high yesterday, as the U.S. Treasury yield pulls back below 5% from a 19-year high.

All eyes are on the Federal Reserve rate decision at 18:00 GMT, where the market is 91% convinced that the Fed will hike rates by 25 basis points. Given that the move is almost fully priced in, the dollar will only marginally benefit from such a move. Instead, the focus will be on whether the dot plot and projections validate expectations of another rate hike this year.

GBP/USD chart analysis

 

GBP/USD trades in a rising channel dating back to late June. The price ran into resistance at 1.370 and has eased back, dropping below the 50 EMA to test support around the lower band of the rising channel and the 100 EMA at 1.3470. The RSI is below 50.

Sellers will look to take out the 1.3470 support to expose the 200 EMA at 1.3425. A break below here could see sellers gain traction towards 1.3335 and 1.3270, the late July low. A break below here creates a lower low, turning attention back to the 1.3200 support zone.

Should the 1.3470 support hold, buyers will look to rise above 1.3550, the September high, to create a higher high and turn attention back towards 1.3650 and onto 1.3700.

EUR/USD at a monthly low ahead of the FOMC rate decision

The U.S. dollar is unchanged, with all eyes on the Federal Reserve rate decision, where the Fed is expected to hike rates for the first time in over two years.

The meeting comes as oil prices are elevated above $100 a barrel and as the U.S. 10-year Treasury yield pushed above 5% for the first time since 2007 on surging oil prices, persistent inflation concerns and a deteriorating U.S. fiscal backdrop.

Higher yields have helped the U.S. dollar push northwards, trading at a two-week high ahead of the decision.

The Fed is expected to raise interest rates by 25 basis points. However, this is 91% priced in, so the bigger question will be whether policymakers validate expectations for further increases this year.

Given Federal Reserve Chair Kevin Warsh's preference for limited forward guidance, attention will be on the dot plot and updated growth and inflation forecasts for clues over what comes next.

There is a chance the dollar could fall if Chair Kevin Warsh hikes rates but plays down the risk of any follow-up moves in the press conference.

EUR/USD forecast – technical analysis

EUR/USD has broken down below the rising channel, taking out the 200 EMA. This, combined with the RSI below 50, keeps sellers hopeful of further downside.

Support can be seen at the 1.1525 support zone. A break below here opens the door to a deeper sell-off towards 1.1350.

On the upside, any recovery would first need to rise above the 50 EMA as well as the horizontal support at 1.1570. A rise above here turns attention towards the 1.1660 level, the falling trendline resistance and the lower band of the rising channel.

A rise above 1.1700 is needed to create a higher high.