GBP/USD, DAX Forecast: Two Trades to Watch

GBP/USD rises ahead of the Fed minutes

• GBP/USD saw steepest fall in 3-months yesterday
• FOMC minutes could provide clues on rate cuts
• GBP/USD recovers from support at 1.2610

GBP/USD is licking its wounds after a three-day losing streak and after its sharpest daily fall in almost three months in the previous session, on USD strength amid higher U S treasury yields.

The greenback fell 2% against its major peers in 2023 on bets the Fed will be cutting rates significantly this year and as the US economy remains resilient.

However, today, the US dollar risk rally has stalled. The USD hovers near a 2-week high against its major peers, supported by higher treasury yields and as risk sentiment sours.

Attention will now turn to US ISM manufacturing PMI data, which is expected to show that the sector contracted at a slower pace in December at 47.1, up from 46.7. JOLTS job openings will also be in focus and are expected to increase slightly to 8.75 million, up from 8.733 million.

FOMC minutes are due later today and could provide further clues about the Fed’s rate cuts plan this year.

The market is not expecting the Fed to cut rates in January but is pricing in a 78% probability of a rate cut in March. Expectations of Fed rate cuts in 2024 pulled the US dollar lower last year. However, the minutes may not provide the dovish clues the market hopes for.

While the Fed signaled plans for rate cuts in 2024, Fed Chair Powell provided few clues on the timing and the scale of those rate cuts. The market may have gotten ahead of itself about cuts next year. Should the minutes disappoint rate cut expectations, USD could rise, pulling GBP/USD lower.

GBP/USD forecast – technical analysis

After facing rejection at 1.2830, GBP/USD has fallen lower, breaking below support at 1.28 and the 20 SMA. The pair found support at 1.2610. Sellers will need to take out this level in order to push the price lower towards 1.2530, the 200 SMA, and 1.25, the December low.

Meanwhile, buyers must rise above the 20 SMA at 1.2670 to extend gains above 1.27, the round number back up towards 1.28.

DAX falls as the recent rate cut rally stalls

• DAX tracks losses in the US overnight
• US data & FOMC minutes in focus
• DAX consolidates between 16650 and 17000

The DAX is falling after steep overnight losses in the US. The tech sector tumbled as the tech sector pulled the S&P 500 0.6% lower and the NASDAQ closed 1.7% lower.

Expectations of a dovish tilt from the Federal Reserve boosted stocks sharply across the end of 2023, and that rally pauses for breath at the start of this year. Investors are questioning whether the rate cuts will be as aggressive as the market is pricing in.

The market has been pricing in up to 160 basis points of cuts this year, which is double what the Federal Reserve had projected, suggesting that the market may have gotten ahead of itself.

Attention will be on economic data for clues, allowing investors to reassess the likelihood of deep cuts across the year. The minutes from the Federal Reserve meeting are due and will help traders gauge the central bank's position.

The economic calendar in Europe is light, with German unemployment in focus. The German labour market is expected to show that the unemployment rate remained steady at 5.9% in December.

DAX forecast – technical analysis

DAX is consolidating after the steep run-up across November and December. The price is holding above the 20 SMA, and trades in the familiar range between 16650 and 17000. The RSI has moved out of the overbought territory.

Should the 20 SMA continue to support the price, buyers will look for a rise back towards a 17000 all-time high.

A break below the 20 SMA 16725 opens the door to 16650, the late December low. Below here, 16530, the July high, comes into play ahead of 16430, the June high.