GBP/USD, DAX Forecast: Two trades to watch

GBP/USD rises to 1.26 ahead of the BoE rate decision 

• USD falls after Fed’s dovish pivot 
• BoE is expected to leave rates on hold 
• Will the BoE push back against rate-cut bets? 
• GBP/USD rises to 1.26

GBP/USD is rising above 1.26 after the dovish lean in the Federal Reserve meeting and ahead of the BoE’s rate decision later today. 

The Federal Reserve left interest rates on hold at 5.25% to 5.5%, as expected, but caught the market slightly off guard with a dovish slant. The Fed projected three rate cuts next year, up from the two rate cuts previously projected The dollar has dropped to a four-month low against its major peers as the market now prices in a 75% chance of a rate cut in March, up from 54% just a week earlier. 

All eyes are now on the BoE, which is expected to leave interest rates on hold at 5.25%, a 15-year high. As with the Fed, the focus will be on policymakers' outlook for growth and inflation for further cues about the timing of the first rate cut. 

Data this week showed an unexpected contraction in October GDP and also a more pronounced slowdown in UK wage growth, although at 7.3%, pay growth is still high. 

In recent speeches, BoE policymakers have remained hawkish, reiterating the need to keep interest rates high for longer as inflation is still 2.5 times the target level. 

Should the Bank of England push back on rate cut expectations, the pound is likely to rise. However, should the BoE raise concerns over the economic outlook for the UK economy and the focus for the pound turn from rate interest rate levels to recession, the pound could come under pressure. 

As well as the BoE interest rate decision US retail sales will be released and are expected to fall 0.1%. However, the Fed meeting is likely to overshadow most US data points until core PCE next week. 

GBP/USD forecast – technical analysis

GBP/USD rebounded from the 200 SMA, pushing above the 20 SMA and 1.26 round number to a peak of 1.2650.  

A hawkish-sounding BoE could propel GBP/USD above today’s high to 1.2690, the rising trendline resistance, and towards 1.2730 the November high. 

A more dovish-sounding BoE could pull GBP/USD lower to test 1.26 and 1.2550. A break below here brings 1.25 the 200 SMA into focus. 

DAX rises to an all-time high ahead of the ECB rate decision 

• Dovish Fed boosts sentiment 
• ECB could follow suit 
• DAX heads to 17000 

The DAX is trading at an all-time high as a dovish Fed boosted sentiment on both sides of the Atlantic. The DAX, along with its European peers, is trading around 1% higher ahead of the open and with the ECB rate decision in focus. 

The ECB is widely expected to leave interest rates on hold at the 4% record high, as inflation cooled significantly to 2.4%, close to the ECB's 2% target level. Data has pointed to the eurozone economy heading to a possible recession in Q4. 

Cooling inflation and contracting growth mean the ECB could be one of the first central banks to cut interest rates in 2024. The market is pricing in a rate cut as soon as March. In recent speeches policymakers have been providing mixed views, with ECB president Christine Lagarde reiterating that the fight against inflation isn't over however, ECB hawk Isabel Schnabel pointed to rate cuts next year. 

The ECB will use updated economic outlook and inflation projections to decide whether to push back on rate-cut bets. However, the move by the Fed almost paves the way for the ECB to adopt a more dovish tone as well. A dovish-sounding ECB could lift the DAX to 17,000. 

DAX forecast – technical analysis 

The DAX has risen to a fresh all time high, close to 17000, the upper band of the rising channel. The RSI is deeply overbought, so buyers should be cautious. 

A rise above 17000, could pave the way towards 17500. 

On the downside, there is minor support at 16730 the weekly low. Beyond here sipport can be seen at 16530 the July high.