The US dollar fell against its major currencies in the European session on Tuesday after a slight decline in US Treasury yields. Investors reflected on recent statements by US Treasury Secretary Janet Yellen that the Fed and the Treasury Department have tools at their disposal to deal with a sharp increase in inflation. Most likely, Yellen so clearly hinted at an increase in the volume of bond repurchases, or an extension of this program as part of assistance in the fight against the coronavirus pandemic. It was not about raising interest rates in the near future, which some investors are betting on. In a recent interview, Yellen said that President Joe Biden's $ 1.9 trillion aid package is aimed at providing the necessary assistance to the economy, which will help return to full employment by next year. "If inflation does become a problem, there are tools to address it," Yellen said.
OECD Report
An interesting forecast from the OECD was published today. It says that the US economic recovery, backed up in time by President Joe Biden's $ 1.9 trillion stimulus package, is bound to accelerate global economic growth. Such a scenario will leave far behind the European economy, which is now continuing to experience difficult times. According to the data, global output will exceed the pre-crisis level by mid-2021. This will happen since the developed economies showed much greater stability at the end of 2020 than predicted. Better coronavirus vaccination will also boost the economy this year.
The OECD raised its global growth forecast for 2021 from 4.2% to 5.6% and more than doubled its forecast for the US to 6.5%. OECD models show that timely aid measures taken by the US democratic administration will increase output by about 3-4% this year, which will add 1.0% to global GDP. "The increase in production will not only lead to a sharp growth in the US economy but will also contribute to global growth by increasing demand," OECD chief economist Laurence Boone said at a presentation in Paris.
Europe, on the other hand, is on a more restrained path of recovery, with government restrictions remaining in place due to the coronavirus pandemic and with fairly restrained stimulus measures compared to the United States. Forecasts for GDP growth in France and Italy were revised downwards.
Today's report on the eurozone's GDP growth rate at the end of 2020 once again confirms investors' concerns about a more protracted economic recovery in the next few years. Due to weak consumer spending, the eurozone economy contracted slightly more in the 4th quarter of this year than the preliminary estimate showed. According to Eurostat, the gross domestic product fell by 0.7% instead of the expected 0.6%. The drop in GDP was due to another economic lockdown, which European countries were forced to resort to as a result of the second outbreak of the coronavirus pandemic. Back in the 3rd quarter of 2020, there was a record growth of 12.5%. On an annualized basis, GDP declined by 4.9% In total in 2020, GDP declined by 6.6% after growing by 1.3% in 2019.
Most likely, in the 1st quarter of this year, the situation is unlikely to change for the better due to the current restrictions that continue to apply in several European countries. Household consumption harmed GDP growth. Consumer spending fell 3%, while government spending rose 0.4%.
Today, good support for the European currency inside the day could be provided by good reports on German exports, which accelerated earlier this year. Imports, on the contrary, decreased. According to Destatis, exports rose 1.4% in January after rising 0.4% in December. Economists had forecast a decline of 1.2%. At the same time, imports decreased by 4.7%. As a result, the trade surplus increased to 22.2 billion euros.
Data on the growth of industrial production in Italy in January of this year also pleased investors. A report from statistics bureau Istat showed that industrial production increased by 1.0% month-on-month after rising by 0.2% in December. Economists had expected growth of 0.7%.
As for the technical picture of the EURUSD pair, buyers should try to protect the level of 1.1880 to form an upward correction in the trading instrument. The nearest target of the bulls is also the level of 1.1935, the breakout of which will hit the stop orders of buyers, which will push risky assets even higher – to the base of the 20th figure. If the bulls do not cope with the task and miss the support of 1.1880, the pressure on the euro will return very quickly. In this case, we can expect an update to the lows of 1.1835 and 1.1794.
GBP
The British pound recovered slightly against the US dollar, while the Bank of England made a clear focus on the labor market, rather than on inflation - following the path of other world central banks. The rise in bond yields does not pass through the UK: while the authorities are thinking about how to properly get out of the isolation regime in which the country has been for more than three months, investors are beginning to get rid of bonds, hoping for good returns in the future after interest rates rise.
Most members of the central bank's committee, led by Governor Andrew Bailey, have pointed nonstop over the past two weeks to the weakness of the economy, including unemployment, which will rise and remain high in the coming months. This will be the main deterrent to the growth of consumer prices. No job – no money. No money, nothing to spend. "The light at the end of the tunnel is about to be seen," Andrew Bailey said in a speech on Monday. "Our latest forecasts show that the economy has stabilized, and the level of activity is beginning to gradually recover," Bailey said.
This suggests that investors are holding the right view that inflation will soon begin to rise, and the bank will begin to tighten monetary policy. However, it is hardly worth giving in to this impulse: the contraction of the economy, which is expected to occur in the first quarter of this year, and the restrictions due to COVID-19, which are finally scheduled to be lifted only in the middle of this year, will continue to deter the Bank of England, which will not change the current monetary policy in the near future, as well as curtail stimulus measures.
The whole focus will continue to be on the labor market. According to the latest data, unemployment reached 5% in the fourth quarter and is expected to average 5.9% next year. And we see these figures when about 80% of wages are paid by the British government as compensation. What will happen to the real indicator when the support ends at the beginning of this summer? Then it will be possible to talk about how the Bank of England will continue to act and what measures to take. It is still too early to talk about any prerequisites for raising interest rates.
As for the technical picture of the GBPUSD pair, the buyers are facing the level of 1.3930, the breakthrough of which will provide a direct road to the base of the 40th figure, and further higher - to new highs in the area of 1.4060. The pressure on the pound will return only after the bears break below the support of 1.3780.
