A Change in Trader’s Risk Appetite Following the Dovish Tone of the Federal Reserve and the European Central BankDeltafx Admin 19 December 2022
GBP/USD Traders risk sentiment changed last week after the unpredictable FOMC statement and, more importantly, after the hints to the European Central Bank. The euro was the biggest gainer at the end of the week, along with the Swiss franc and the US dollar. The Australian dollar was the worst performer among the major currencies, followed by the pound sterling and finally the New Zealand dollar.
These developments could lead to a weakening of risk in the markets for the rest of the year, which could favor and strengthen the dollar.
Changing Trader Inclinations Due to the Tight Approach of the European Central Bank and the Federal Reserve
Last week’s central bank meetings surprised most traders. The most important was the speech of Christine Lagarde, the president of ECB, who announced in a rare way that the interest rate will be increased by 50 basis points for another period. This decision was probably made in the expectation that the economic recession in the Eurozone would be only a superficial recession. At least two more 50-point increases are now expected in February and March.
The new economic forecast of the U.S. Federal Reserve was published more pessimistic than expected and assumes an average increase in the key interest rate of 5.1 percent in 2023, which is 0.1 points higher than expected. The consequence of all these decisions is a trend reversal on the markets. The sharp decline in the DAX at the end of the week confirmed that it has reached the level of 14675.84 in the short term. It is now near the support zone between the correction from 11862.84 to 14675.84 at 13601.27 and the 55-day EMA. A recovery from this support zone keeps the 14675.84 correction pattern as an action area. However, a strong break of the support zone opens further declines towards the 61.8% retracement at 12937.40 and possibly below.
In the US, a decline in the NASDAQ has increased the chances that the recovery from 10,088.82 could be completed at 11,571.64, and a stronger downtrend from 16,212.22 is ahead. A further decline now favors a retest of 10088.82 in the near future or even a doubling of the projected target of 9660.62/9689.96. In the meantime, stronger support from there is expected to complete the downtrend. If so, the DOW pullback from 34,595.51 should be above 28,600.94.
The dollar index continues to slow down and bounce back
The dollar index fell last week, but lost its downtrend strength. The strength of the euro is clearly limiting the recovery of the DXY. However, with the 55-week moving average (now at 104.05) coming under pressure, a reversal is overdue. A break of resistance at 105.82 should signal a short-term move lower and trigger a stronger retracement to the 55-day EMA (now at 107.43) and above. However, a sustained trade below the 55-week EMA would pave the way for a stronger and deeper decline towards the 61.8% retracement of 89.20 to 114.77 at 98.96.
GBP/USD Weekly Outlook
GBP/USD rose to 1.2445 last week, but reached a short-term high and then turned down. The first trend for this week is that the 55-day EMA (now at 1.1853) is slightly down. There is a stable break, the 38.2% retracement of 1.0351 to 1.2445 is targeted at 1.1645. As long as the resistance at 1.2445 holds, the risk remains on the downside for now.
on the 4-hour chart on the longer-term chart, a recovery from 1.0351 would at least correct the general downtrend from 1.4248 (2021 high) in the medium-term. As long as the 55-day moving average (now at 1.1853) holds, it will continue to hold.
On the long-term chart, the long-term outlook remains neutral at best as long as the resistance at 1.4248 (high of 2021) does not hold. The downtrend that started at 2.1161 (2007) could still continue to its next low at 1.0351.