Overbought dollar giving a little back

Both GBP/USD and EUR/USD remain in overbought territory but have seen a little dollar weakness readdressing the imbalance.

Pound coins and dollar note
Source: Bloomberg

GBP/USD oversold

With just over twenty-four hours until George Osborne announces the latest UK budget, GBP/USD has retraced some of its recent falls. The last couple of weeks have seen aggressive dollar strength and GBP/USD had moved heavily into oversold territory. Regardless of the chance that the Federal Open Market Committee might bring interest rate rises forward to June/July, the one-directional move was always due for a correction. The question that really remains is, how long before it starts to selloff again?

The temptation for traders to take some of their short profits off the table while waiting for both the UK and the US to announce major economic statements will no doubt see this correction stretch throughout the day.

Although the current $1.4780 level remains oversold it is hard to see GBP/USD breaking back above $1.5000, and this looks likely to be the top of any further bounce.

Bearish mindset on euro unlikely to change

So far this week announcements coming out of the eurozone have been limited. Arguably, with the way things had been developing with Greece less is more. As EUR/USD moved into aggressively oversold territory a retracement was warranted but any bounce is likely to be short-lived as traders bearish mindset on the euro is unlikely to change in the short-term.

Institutional notes on the currency pair have been updated in the run up to the FOMC statement on Wednesday afternoon, and fresh targets have been posted. Deutsche Bank outlined its target of $0.90 in EUR/USD in 2016 and down to $0.85 in 2017. Overnight ING also posted its targets with a call for parity in EUR/USD during Q2 and a fall down to $0.95 by the end of the year.

Any bounce in the currency pair is likely have limited upside and a limited time frame. Unless the FOMC disappoint the market by failing to change the ‘patient’ stance, this dip could just be an attractive bounce to short.

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