Overview of EUR/USD and GBP/USD on May 21, 2020

By | May 21, 2020
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Overview of EUR/USD and GBP/USD on May 21, 2020

US labor market data may be a cold shower for those who believe in renewed growth due to the completion of quarantine measures. The growth of initial applications gained to 2.438 thousand, repeated more than 25 million, which is significantly worse than forecasts. The US economy has not yet begun its recovery, and stock indices at the opening are likely to go into the red zone.

EURUSD

As you would expect, the May PMI indexes from Markit confirmed a clear improvement in the business climate, noted in a similar study from ZEW. The general mood can be expressed in one phrase – it is expected that the summer will begin an economic recovery.

PMI indices both in the manufacturing sector and in the services sector are still deep in the negative zone, but investors regard the dynamics as positive and assume that the bottom was fixed in April and the phase of economic growth begins. Only this can explain the fact that the PMI is 28.7p. (service industry) or 30.5p. (manufacturing sector) are perceived as optimistic.

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The proposal by France and Germany to create a fund of 500 billion euros to support the economies of the eurozone countries supports the euro, contributing to a growing interest in risk. It is important here that the ECB, with which the Bundesbank is in opposition, involves the implementation of similar measures. The only question is under whose direction will the restoration of the eurozone goes. Who will receive dividends from process management is the main issue, and the need for large-scale incentives is not denied by either side.

This means that in any case, risky assets will receive support. Objectively, the situation is in favor of the euro, EURUSD may break the resistance of 1.1017 and go beyond the range, in this case, growth to 1.1150 at the current impulse is possible. If the resistance persists, then the likelihood of a rollback to intermediate support 1.0830 / 40 will increase.

GBPUSD

On Wednesday, the UK placed government bonds with negative yield, the placement volume is low, and this placement was made for the first time in history and gives investors reason to believe that the Bank of England will nevertheless introduce negative rates at one of the next meetings.

One of the reasons voiced is a sharp decline in inflation. This is not entirely true as in April, the consumer price index graduated to -0.2% m / y year-on-year, price growth slowed down to 1.4%, that is, even quarantine could not lower inflation lower than in the United States and most countries of the eurozone. Moreover, is the coronavirus to blame? As shown in the graph below, inflation has been slowing for three consecutive years, that is, it has deep economic roots, and is not at all a consequence of the pandemic.

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Here is a CBI report that is much more informative. According to the latest monthly research by CBI Industrial Trends, production volumes for the three months to May fell at the fastest pace in the history of research (since July 1975). Production fell in 15 of 17 sectors, and industrialists expect the decline to continue in the next three months. The manufacturing sector is not preparing to improve the situation, as might be expected from the PMI Markit results, but to reduce it further.

In addition, average sales prices are expected to fall at the fastest pace since April 2009 over the next three months. It turns out that quarantine measures are lifted, a revival of business activity is expected, and prices, on the contrary, will decline.

Therefore, issuing bonds with negative returns is not a response to the current pandemic crisis, but a response to a combination of reasons in which a pandemic is only one of many and probably not even the main one.

The pound is trying to roll back from the low of 1.2077 formed on May 18. The general growth of optimism helps strengthen the GBP, however, the resistance zone 1.2245 / 65 has not been overcome, the trend remains bearish, the probability of movement to 1.2182 and further to 1.2077 is high.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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