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FX.co ★ Euro and pound prepare for strong movements

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Forex Analysis:::2019-09-23

Euro and pound prepare for strong movements

On Monday morning, the markets show mixed movements. There is no uniform dynamics and the uncertainty factor is growing again.

The level of geopolitical risks has grown as the United States has announced new sanctions against Iran, which for some reason are associated with the recent re-enactment of the attack on Saudi Arabia. Consequently, oil and gold are growing. Oil growth is beneficial to the US oil shale industry; without this growth, the industry confidently rolled into bankruptcy.

Stock indices do not have single dynamics. The Indian Nifty50 is gaining more than 3%, while Shanghai is losing more than a percent amid another wave of rising trade concerns. If the negotiations that were initially held on September 19-20 were regarded as constructive, then by Friday evening, it became clear that the Chinese delegation had completed the visit ahead of schedule and refused to visit farms in the states of Nebraska and Montana, which the markets regarded as a likely failure in the negotiations.

The Fed is preparing to take some decisions to provide markets with liquidity since the recent deficit has caused a strong increase in repo rates. Also, a drop in GDP growth is expected.

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The dollar looks weak in the current conditions. Most leading banks are reviewing their long-term models and expect the Fed to prepare to announce a new expansion of the balance sheet under one pretext or another.

EUR / USD pair

Today, PMI data will be published in Germany and in the eurozone as a whole. Forecasts are weak and no growth is expected for any indicator. As long as the service sectors look more or less confident, there is no recession. However, if a negative trend emerges, the market's response may be strong toward a euro decline.

On Monday, the EUR/USD pair has no direction. The euro continues to trade range-bound but the likelihood of a break down has increased.

GBP / USD pair

The main thing that was understood from the results of the meeting of the Bank of England was the confirmation that the uncertainty with Brexit could reduce demand and inflation, which would ultimately lead to lower rates. Until the Brexit situation is resolved, the Bank of England remains locked in a narrow range of possibilities. All that remains is to maintain a cheerful tone and wait for clarity to come.

Meanwhile, there is a simple indicator that shows what the Bank of England is doing in the face of a slowing economy. As soon as the PMI starts to go down, the BoE loosens the policy as it was anyway before. Moreover, if there were uncertainty with Brexit, then the Bank of England would have already reduced the rate; perhaps more than once.

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Currently, the GDP forecasts for the third quarter, suggest an increase of 0.2%. This is slightly, but still above zero. That is, the recession is still somewhere on the horizon. The forced recognition that uncertainty increases the likelihood of a decrease in demand, especially in the context of a global slowdown, has offset recent data on average wage growth rates of 4%. This was the highest growth rate in 11 years. The reason for this skepticism is that the Bank of England expects a slowdown in the labor market, and there are reports from some leading indicators that indicate this.

In case the Brexit situation does not get permission, the forecast of BoE said that"... the exchange rate will fall, CPI inflation will increase, and GDP will slow ..." Accordingly, the extension of the period of uncertainty until the end of January means a downward reversal for the pound. While the GBPUSD is trying to hold on to the upward momentum, it seems that Johnson is still losing and all hope is now for the goodwill of the EU negotiators. In the meantime, we need to proceed from the fact that the pound will go down if the EU does not take steps towards it.

The key support for the short-term is 1.2435 and its fall will increase the chances of a downward correction. Technically, the pound still maintains an upward trend. Therefore, growth attempts due to rumors of a softening EU position will continue to push the pound up to a recent high of 1.2582. This is currently the only factor holding the pound up the channel.

Kuvat Raharjo
Analyst InstaForex
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