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

GBP/USD rises as the UK economy grew fast than expected in 2022

• UK economy grew 4.3% in 2022
• UK Q2 GDP is unrevised at 0.2% QoQ, but the outlook remains weak
• US core PCE is forecast to cool to 3.9% from 4.2% YoY in August
• GBP/USD is extending its recovery towards 1.23

The pound is pushing higher on the back of U.S. dollar weakness and as investors digest the latest UK GDP data.

The UK economy grew 0.2% in the second quarter, as confirmed by the final reading. However, in 2022, growth was revised higher from 4.1% to 4.3%, showing that the UK economy grew faster than its G7 rivals. The UK economy is now forecast to be 1.8% above its pre-pandemic level.

Despite the upbeat GDP data, the outlook for the UK economy does remain weak as the more timely PMI data earlier this month showed that business activity contracted again pointing to a contraction in the third quarter.

While the pound is pushing higher today, it's on track for its worst month in a year on a combination of expectations that the Bank of England has reached peak rates and owing to a stronger U.S. dollar.

The US dollar is edging lower versus its major peers, for a second straight session as US treasury yields ease from recent highs ahead of US inflation data.

US core PCE, the Federal Reserve's preferred gauge for inflation, is expected to cool to 3.9% from 4.2%. Meanwhile, personal spending is expected to rise 0.4% off the rising 0.8% in July. Hotter-than-expected inflation and stronger-than-forecast spending would support the Fed’s more hawkish stance and could lift the US dollar higher.

GBP/USD forecast – technical analysis

GBP/USD’s recent runoff ran into resistance at 1.2110 and is extending its rebound above 1.22 towards 1.23, the level that buyers will need to overcome in order to extend the rebound. The RSI has come out of oversold territory.

Meanwhile, sellers could be encouraged by the 20 sma crossing below the 200 sma and the 50 sma crossing below the 100 sma. Sellers will look for a break below 1.2110 to extend the selloff towards 1.20 at the psychological level.

EUR/USD rises ahead of inflation data

• Eurozone inflation is expected to cool to 4.5% from 5.2%
• ECB Lagarde to speak
• EUR/USD recovers towards 1.06

EUR/USD is extending gains for a second day as US treasury yields ease and as investors look ahead to a busy day on the economic calendar.

German retail sales rose by 0.4% MoM in August, recovering from a -0.6% decline in July but falling short of the 0.5% forecast. German private consumption accounts for around 51% of the German GDP so weak consumption could support the view of a prolonged recession in Germany.

Meanwhile, French inflation was also cooler than expected, holding steady at 4.9% YoY, defying expectations of a rise to 5.1%. Attention will now turn to eurozone inflation, which is expected to cool to 4.5% YoY in September, down from 5.2%. Cooling inflation would support the market's view that the ECB has reached the end of its hiking cycle, which the ECB alluded to in the September meeting.

ECB president Christine Lagarde will be speaking later today and investors will be watching comments carefully for clues over the future path for interest rates. Lagarde could reiterate the need to keep rates high for longer in order to tame inflation which could influence EUR/USD.

US inflation data will also impact the pair as well as US Michigan consumer confidence.

EUR/USD forecast -technical analysis

EUR/USD found support at 1.0488, the January low, rebounding higher and pulling the RSI out of overbought territory.

Buyers will look for a rise above 1.0635 to extend the rebound towards 1.0740, last week’s high and the falling trendline resistance.

Should the recovery run out of steam, sellers will look for a break below 1.05488 to extend the downward trend towards 1.04.