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

GBP/USD fall after UK inflation cools by more than forecast 

• UK CPI eases to 3.9% from 4.6% 
• The market has ramped up rate-cut bets 
• GBP/USD falls towards 1.26 

GBP USD is falling after UK inflation cooled by more than expected in November. CPI eased to 3.9%, its lowest level since 2021, down significantly from 4.6% in October. Forecasts had been for inflation to cool to 4.4%. 

Meanwhile, core inflation was also significantly cooler than expected at 5.1%, down from 5.7% and well below forecasts of 5.6% 

Delving deeper into the numbers, food price inflation, one of the largest drivers of the cost-of-living crisis, returned to single digits for the first time since June 2022. Energy prices also fell, and service sector inflation, which the Bank of England watches closely fell to 6.3%, down from 6.6%. 

The data suggests that the Bank of England was too cautious in last week's meeting when it left interest rates on hold at 5.25% but also said that there was a lot of work to do in order to tame inflation. 

The market is now pricing in 145 basis points or rate cuts in 2024, which equates to five 25 basis point cuts being fully priced in. 

As a result, the pound has fallen to 1.2650, and stocks have surged higher by the banks and home builders. 

Looking ahead, attention now turns to the US, where consumer confidence data is due later and is expected to rise to 104 in December, up from 102. Improving consumer sentiment goes hand in hand with a rise in consumer spending, which would be inflationary and could send the dollar higher. 

The USD hovers around a 4-month low versus its major peers on bets that the Fed will cut rates from early next year. 

GBP/USD forecast – technical analysis 

GBP/USD failed at the rising trendline resistance around 1.2730 and has fallen lower, heading towards the 20 sma and yesterday’s low at 1.2630. 

Should sellers take out this level and 1.26, the 200 sma at 1.2510 comes into target. 

EUR/USD falls despite German consumer confidence ticking higher 

• German consumer confidence rises to -25.1 from -27.6 
• USD could benefit from safe-haven flows amid Red Sea developments 
• EUR/USD failed at 1.10 

EUR/USD is falling lower despite German consumer sentiment pointing to a brighter start in the new year. 

The GfK consumer sentiment index rose to -25.1 in January up from a revised -27.6 in the previous month and ahead of expectations of -27. 

The brightening outlook comes as interest rates and inflation are expected to fall, but geopolitical crises and wars are also a main concern. 

Improving consumer sentiment often goes hand in hand with an improved willingness to spend which is good news for the German economy, which is expected to have tipped into recession at the end of 2023. 

Meanwhile, the US dollar is inching higher after two days of losses, although it remains around a four-month low, amid bets that the Federal Reserve will be cutting interest rates next year. 

The greenback could also be benefiting from some safe-haven flows as the Red Sea chaos sees ships re-route and leaves the US weighing up whether to attack the Houthi rebels in Yemen.  

US consumer confidence data is due later today. 

EUR/USD forecast – technical analysis 

EUR/USD failed to rise above 1.10 and is edging lower. The price still trades above the rising trendline, which offers support at 1.0925.  

Sellers would need to break down this and 1.0890 the weekly low to create a lower low and expose the 200 sma at 1.0830. 

Any recovery needs to break above 1.10 which is proving to be a challenge, to extend gains to 1.1020 the November high and 1.1060 the August high.