Dovish Fed may push GBP/USD to 1.54 levels

January 28, 2015

Washington (Jan 28)  The US dollar witnessed a bout of profit booking across the board after the release of the surprisingly weak US Durable goods data yesterday. The 10-year Treasury yields hit a low of USD 1.75%, while Gold prices rallied to near USD 130/Oz levels. The US dollar index fell to 94.22 levels.

Meanwhile, the GBP/USD pair rose to 1.52 levels today, marking another day of struggle around the same.

GBP/USD may rise to 1.54 levels if the Federal Reserve (Fed) comes-out less hawkish than expected.

• Bank of England least dovish in Europe – The latest Bank of England minutes showed a unanimous vote to maintain the interest rates at record low levels, post which the pair had declined to 1.5050 levels. However, the bank still appears least dovish among its European counterparts. Hence, a slightly less hawkish Fed is likely to favor a sharp rise in GBP.

• Negative data priced-in – The GBP/USD pair has managed to sustain above 1.50 levels despite a string of weaker-than-expected economic data in the UK. Moreover, the UK 10-year bond yields have consolidated around 1.47% since mid-January. On the other hand, the 10-year Treasury yields in the US have declined from 1.95% seen last week to the current rate of 1.77%.

• Bullish RSI divergence on the daily charts – The pair confirmed a bullish RSI divergence on the daily charts after posting back to back gains in the previous two consecutive sessions. The pair is likely to witness a bullish crossover between 5-DMA and 10-DMA levels.

The bullish view is largely dependent on the view that the Federal Reserve would come out less hawkish amid non stop action from all other central bankers. Even if the Fed does not change much of its stance and language with respect to the interest rates, the market is likely to witness the correction in the US dollar across the board. Technically, the bears are likely to stay on the sidelines so long as the pair trades below 1.51 levels.

Thus, overall the up move anticipated at current levels provides an attractive risk reward ratio.

Soiurce: FXstreet

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