GBP/USD, DAX Forecast: Two trades to watch

GBP/USD falls after UK economy contracts & ahead of the Fed 

• UK GDP falls -0.3% MoM in Oct 
• Fed could sound hawkish, given recent data 
• GBP/USD trades in a holding pattern 

The pound is falling after UK GDP data contracted by more than expected in October, raising concerns of a recession in the UK. 

GDP shrunk -0.3% MoM in October after rising 0.2% in September. This was below forecasts of 0%. 

The contraction comes as the BoE’s aggressive rate hiking cycle slows the economy. The figures come after UK wage growth slowed by the fastest in two years and support the view that the BoE has finished hiking interest rates.  

However, the question is whether it is enough for the BoE to adopt a more dovish stance on Thursday. I think not. The central bank will likely acknowledge the slowing economy but stick with its cautious tone, saying it's still too early to discuss cutting rates. 

Meanwhile, USD is rising ahead of the Federal Reserve interest rate decision later today, where the Fed is expected to leave interest rates on hold at 5.25 to 5.5%, the 22-year high.  

The focus will be on forward guidance and when the Fed might start to cut rates. The Fed will provide up-to-date projections and update the dot plot, which is likely to be less optimistic about rate cuts the market is currently pricing in. The markets are pointing to 100 basis points of cuts next year compared to the 50 basis points expected by economists. 

Given the robust jobs data on Friday and signs that inflation is sticky, the Fed will likely err on the side of caution, conscious that the fight against inflation has not yet been won. 

It's also worth remembering that the Fed chair has adopted a less dovish tone than some other Fed policymakers, even before the recent relatively solid data, again suggesting they will push back against rate cut bets, which could lift the USD. 

Should the Fed not push back on rate cut expectations, this could be a green light for further losses in the USD. 

GBP/USD forecast – technical analysis 

After briefly rising to 1.26 yesterday, GBP/USD continues to trade in a holding pattern caught between 1.26 and 1.25, last week’s low and the 200 SMA. The RSI is neutral, giving away a few clues. 

Sellers will look for a break below 1.25 to gain momentum and extend losses to 1.2430, the early November high. 

Any recovery would need to rise above 1.26 to bring 1.730, the November high, into play. 

DAX rises ahead of industrial production & the Fed 

• German industrial output falls -0.6% MoM 
• Fed rate decision in focus, ahead of the ECB tomorrow 
• DAX is deeply overbought 

DAX is edging higher despite a larger-than-expected decline in industrial output and ahead of the Federal Reserve interest rate decision later today and the ECB rate decision tomorrow. 

The mood remains cautious as investors look for clues from central bankers over when the first-rate cuts could come and to what extent the Fed and the ECB intend to cut over the coming year. Should we hear more dovish calls from the central banks, this could be a green light for the Santa rally. However, the Fed at least is likely to want to strike a more dovish tone, which could hurt stocks in the near term. 

On the data front, industrial production dropped -0.6% MoM in October after falling -1.1% in September. The data is another weak data point for the sector and raises the likelihood of a recession in the euro area, which could prompt rate-cut bets. 

Looking to the ECB rate decision tomorrow, the central bank is expected to keep rates on hold at a record high and could guide towards cutting interest rates early next year.  

A dovish-sounding ECB could boost the DAX up to fresh record highs. However, should the ECB sound particularly cautious about the health of the eurozone economy, this could act as a drag on risk sentiment and the DAX. 

DAX forecast – technical analysis 

The DAX continues to trade within its acceding channel, although the RSI is deeply overbought, which should warrant caution. 

Resistance can be seen at 17000, the psychological level, and the upper band of the rising channel. 

Support is down at 16530, the July high, with a move below here negating the near-term up trend. Below here, 16000 comes into play..