The European currency and the British pound strengthened their positions against the US dollar after the release of a number of fundamental statistics for March this year, which clearly shows the beginning of a recession in developed economies.
Today’s report on the rate of decline in the UK’s GDP is only a distant echo of what awaits the country in the future. The worst is yet to come, when the reports for April and May begin to be published, where the country was already completely paralyzed due to the spread of the coronavirus. While it is difficult to estimate the exact scale of the decline, according to some experts, the economy may lose up to 30% in the 2nd quarter. Even though the UK was late in introducing the quarantine regime, a longer period of isolation will have a detrimental effect on all economic indicators.
According to the statistics agency, in the 1st quarter of this year, UK GDP decreased by 2.0% year-on-year, while economists expected a decline of 2.2% immediately. However, the quarantine in the UK began only on March 23, while in other European countries, isolation measures were taken much earlier, which led to a larger reduction in GDP. In March, compared to February, the economy declined more significantly, immediately by 5.8%, and by 2.0% compared to the 1st quarter. Economists had predicted a drop in GDP of almost 8.0%. The Bank of England expects a clearer picture by the end of May this year, and in just the 2nd quarter, the economy may contract by 25%.
Such indicators suggest that the economy is 100% likely to be in a recession, and when it will get out of it, we can only guess. The UK will not return to pre-crisis levels until 2022, as social distance standards are likely to be in place before the vaccine is available.
After the release of the report, the market could watch the growth of the British pound, as traders were generally encouraged by the fact that the data was much better than the forecasts of economists, although it indicated a contraction of the economy. This leaves hope for a larger jump in recovery after the lifting of restrictive measures. However, there are also those who are more pessimistic about the pace of future GDP growth, since if measures of social distancing can be weakened, then it will not be possible to influence the labor market so easily. A significant increase in unemployment in the UK will hold back the recovery of the economy after the pandemic.
As for the technical picture of the GBPUSD pair, while buyers of the pound have confidently managed to cope with the level of 1.2310 and expect to continue the upward correction to the maximum of 1.2380 and a test of a larger resistance of 1.2470. If the pressure on the pound returns in the second half of the day, it is best to return to long positions only after updating the minimum of 1.2250. Larger players will be waiting for the test of the new areas of 1.2210 and 1.2150.
The European currency has slightly regained its positions against the US dollar, getting close to a fairly important resistance level, the break of which will provide the pair with a new bullish impulse to the highs of 1.0930 and 1.1010.
The report on industrial production in the Eurozone, which was better than the forecasts of economists, provided support to buyers of risky assets, who were completely bored without positive news.
According to the statistics agency, industrial production in the Eurozone in March this year decreased by -11.3% compared to February and fell immediately by 12.9% compared to the same period in 2019. Economists had expected production to fall by -12.8% and -12.4%, respectively. I think it makes no sense to talk about the reasons for the reduction in production, since isolation measures, a surge in unemployment, and disruption of logistics chains, along with the disruption of supplies and the freezing of the economy, have led to such record figures.
However, talking about a larger continuation of the recovery of the European currency is rather premature, since the differences between the northern and southern countries of the eurozone are increasing, which paralyzes the actions of the European Central Bank, which is preparing a new aid package. Even if the Bundesbank and the ECB manage to agree on an increase in the quantitative easing program, it is unlikely to solve the fundamental problems of the southern countries, and after the COVID-19 crisis, after funding cuts, the situation will only get worse. However, if the EU does not come to a consensus on increasing the volume of financing for weak southern countries, such as Italy, Spain, Greece, etc., then it is quite possible that governments will be forced to increase the issue of government bonds, which may lead to an expansion of the spread of government bond yields between the northern countries. For example, at the moment, the yield spread of 10-year government bonds in Italy and Germany is 244 basis points.
As for the technical picture of the EURUSD pair, it has not changed much compared to the morning forecast, except that traders have approached the resistance of 1.0880 and further movement will depend on the speech of the Fed Chairman. A break of 1.0880 will lead to a new wave of growth in the area of highs 1.0930 and 1.1010.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.