27.05.2019 11:49 AM
The euro is consolidating, while the pound is trying to resume growth

The trade war between the United States and China is moving into the phase of using heavy weapons. The pressure on Huawei has increased many times; suppliers of Intel Corp. chips, Qualcomm Inc., are connecting to blocking cooperation with the Chinese digital giant and Broadcom Inc., Google has imposed a ban on the use of software products, and moreover, there are threats to expand the list of technological giants of China, which will be denied access to the markets of the United States and its allies.

There is no doubt that a large-scale and mutually beneficial trade deal between the United States and China is impossible. Any decision will be temporary, since the US insists on nothing less than changing China's economic policy and rejecting the role of technology leader, which is completely unacceptable for China. Violations of the WTO rules, which are used by the United States, may induce the Chinese government to reduce purchases of US government bonds or to limit the supply of rare earth metals to US companies, which will put them at risk of stopping production.

So far, Trump's aggressive policy does not bring any visible dividends to the US economy. Business activity in the manufacturing and services sectors declined markedly in May, and the volume of new orders completely updated the 9-year minimum.

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The trend is confirmed by other sources. Orders for durable goods, reflecting the level of industrial enterprises and consumer pressure, declined in April by 2.1%, which turned out to be worse than expected. There is also a slowdown in sales of new homes. The forecast for GDP growth from the Atlanta Fed for the 2nd quarter is still at the level of 1.3%, while the forecast from the Philadelphia Fed is lowered.

Panic has not yet covered the markets, but it is precisely this. Markets in Europe opened on Monday with growth, partly because of Trump's easing rhetoric, but panic will inevitably increase in the coming weeks, leading to a reversal of stock indices to the south and increased demand for defensive assets.


The euro has few chances to resume growth on Monday. PMI indices in May both in Germany and in the eurozone were generally worse than expected. Ifo's optimism indexes, which showed a decline in most indicators, correlate with them, and the first results of the European Parliament elections show an increase in the popularity of the right, which will increase the centrifugal sentiment in the eurozone.

The possible growth of EURUSD is limited by the 1.1220 / 25 zone and may trigger a new wave of sales, more likely a slow decline towards the support of 1.1110 / 20 and consolidation for a break down.


Theresa May made an official statement in which she confirmed her intention to resign as the leader of the Conservative Party from June 7, 2019. Already on June 10, the conservatives launch the process of choosing a new leader, the name of the successor to May will be known before the summer holidays of parliament, July 20.

This resignation is a consequence of the inner-party struggle. May remains in the post of prime minister and will fulfill her duties for some time, at least until the end of the procedure for electing a new leader.

The pound responded with a slight increase. Apparently, the markets do not know how to react to the resignation of May. Nevertheless, they assume that the new leader will be able to reduce the uncertainty, which is generally regarded as a positive factor.

However, the pound received support earlier than May announced its resignation. The volume of retail sales in April did not change relative to March, while a decline was predicted, a year-on-year growth of 5.2%, which is also higher than forecast, and this figure is one of the highest in Europe.

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Growth rates are on maximum since the summer of 2018. Against the background of reduced investment, retail remains one of the main factors of still high inflation, which gives the pound a chance for a quick recovery if Brexit uncertainty decreases.

It is a bank holiday in the UK this Monday. Thus, increased volatility is possible in the thin market, but in general, strong movements are not expected. The lack of macroeconomic news shifts the focus to political factors which are now expected to be in favor of the pound. GBPUSD has formed a temporary base in the 1.26 area. Thus, on Monday, growth is possible to resistance at 1.2770 / 90. After which, a consolidation is expected in anticipation of new data.

Kuvat Raharjo,
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