At the very opening of the European trading session, the pound sterling began to actively increase and this is slightly strange. It is clear that the correction suggested itself after a sharp decline. However, the fact that it started so quickly and confidently is somewhat surprising. Moreover, the UK inflation accelerated from 2.1% to 2.5%, against the expected 2.3%. This inflation growth is largely a negative factor, especially in the current environment. However, the main threat posed by rising inflation is a slowdown in economic recovery.
It should be noted that inflation growth only increases these risks and does not guarantee that this will really be the case. This means that we are only talking about probabilities and possibilities. Moreover, it was exactly the rise in inflation in America that led to the strengthening of the US dollar. We can say that inflation growth was expected anyway but it just turned out to be slightly larger than predicted. So, the data did not fundamentally differ from what they wanted to see. It can also be recalled that the pound formed a clear oversold status the day before.
Inflation (UK):
The Euro currency was just marking time before the opening of the US session. It is worth noting that the growth rate of industrial production slowed down from 39.4% to 20.5% against the forecast of 25.1%. Albeit strong deceleration, these data are not entirely enough due to the popular low base effect, which still distorts the data. And since the annual data is not informative, it is necessary to look at the monthly, which everything is very bad.
Throughout the month, industrial production declined 1.0%, when it should rise by 0.1%. The decline is quite significant. Moreover, the European industry is still trying to recover from the consequences of the coronavirus crisis, so it is not surprising that the Euro currency essentially stood still during the European session.
Industrial production (Europe):
By the time the US session came, the euro finally began to increase and the pound only continued to strengthen its positions, which was facilitated by the data on US producer prices. Their growth rates accelerated from 6.6% to 7.3%, which turned out to be significantly higher than the expected 6.8%. This means that American inflation will continue to grow. There is no doubt that the sudden inflation growth completely surprised the market participants, which provoked a slight panic. However, everything is much simpler and clearer this time – inflation will obviously grow. This is frightening, as it threatens the economic recovery of the US. But even if this data is absent, the US dollar would still lose its position since it is overbought.
Producer Price Index (United States):
The pound's correction seems to have been somewhat overdone, and as a result, it returned to almost the same values at which it was before the publication of US inflation data. Moreover, it began to actively and confidently fall during the Asian session that it almost returned to the same values at which it was just before the start of yesterday's correction. This indicates that the pound shows incredible volatility. As a result, it began to slightly grow just before the publication of the labor market data. The forecasts were relatively good, although the data did not come out exactly as expected.
The unemployment rate, which was supposed to remain unchanged, increased from 4.7% to 4.8%. In this case, the pound instantly stopped its growth, and even attempts to reduce began to manifest themselves. Another thing is that the constant fluctuation has already disoriented market participants, and no one understands where the equilibrium point is. Accordingly, it is completely unclear whether the pound needs to decline now or whether the correction is not yet over and it now needs to grow. Most likely, the main result of the publication of data on the labor market will be the normalization of the situation and consolidation in the area of current values.
Unemployment rate (UK):
The US dollar is likely to continue rising today, which will be supported by relatively good macroeconomic data. In particular, the number of initial applications for unemployment benefits may decline by 5 thousand, and the repeated ones by another 39 thousand. In addition, industrial production should rise by 0.6%. However, this is in monthly terms, as the annual data is still distorted by the effect of the low base, and the growth rate should slow down from 16.3% to 12.2%. As we can see, the values are quite impressive, and it is too early to draw any conclusions based on them. In any case, statistical forecasts are quite optimistic, which will contribute to the strengthening of the US dollar.
Industrial Manufacturing (United States):
The EUR/USD pair rebounded from the support level of 1.1800 again, eventually having an almost similar amplitude from July 8. It can be assumed that the level of 1.1800 will continue to focus the interest of market participants, and the previously known coordinates of 1.1850/1.1890 will act as a resistance area.
The GBP/USD pair has a fairly wide amplitude of fluctuations, during which the quote managed to temporarily restore positions on the pound sterling relative to the decline from July 13. It can be assumed that the characteristic amplitude will remain in the market, but we will get a compression effect at the end. In relation to this, a new round of acceleration will occur.
