While traders and economists are wondering how the euro can respond to the EU summit and the decisions to be taken on the economic recovery fund, the US Department of the Treasury has released another report on the increasing government debt and budget deficit in the United States. Oddly enough, the euro slightly rose at this news, since traders believe that there will be open dialogue between EU leaders in approving the 750-billion assistance plan proposed by the European Commission.
At the end of last week, the Eurogroup held a meeting, during which the finance ministers were able to develop a fairly clear plan for the use of borrowed funds that will be spent on rebuilding the EU economy after the coronavirus pandemic. The distribution of funds will be as follows: 70% of the recovery fund will be involved in 2021 and 2022, while access to the remaining 30% will be open in 2023, after analyzing the fall in GDP of the eurozone countries in 2020 and 2021 . The general package should be mastered by 2026.
However, it is still necessary to analyze the decision of the European Central Bank on monetary policy, since although many experts do not expect the regulator to make major changes, there are a number of nuances that could happen during the EU summit.
Nevertheless, many do not expect huge pressure on the risky assets, as many believe that even though the plan is not approved immediately, it will occur by fall of this year. Any decision in this direction will support the European currency, as it will be safer, but the main support will still come from investors who avoid the risks relative to the coronavirus and its consequences for the economies. The leaders of the European Union will discuss the creation of an economic recovery fund at the summit on July 17-18.
Meanwhile, in the United States, the US Department of the Treasury published a report on the increasing government debt and budget deficit, which shows that the costs associated with the coronavirus pandemic led to an increase in the US budget deficit in June to $ 864 billion . This suggests that government spending increased at least three times in June compared with the same period last year. A sharp drop in government revenues due to a number of tax benefits has led to a reduction of 28% to $ 241 billion, but government spending has grown to $ 1.1 trillion, and this is probably just the beginning. In total, the budget deficit for the period of October 2019 to June 2020 completed to $ 2.7 trillion.
However, it does not particularly concern the Ministry of Finance and the White House administration, as its whole focus is on fighting the coronavirus and saving the economy after the pandemic.
Yesterday, Fed representative Robert Kaplan said in his speech that he expects the US economy to shrink from 4.5% to 5% this year. The unemployment rate will be 9% -10% by the end of the year, and economic recovery will occur only in the second half of the year. However, for this to happen, additional actions in the fiscal sphere will be needed, as well as measures in the health sector, which during the pandemic plays a key role for the future economy.
Meanwhile, another interesting report was also published yesterday but on the Italian economy, which, after a collision with the coronavirus, is experiencing a terrible time. Apparently, without the European Commission's recovery plan, the problems will only worsen, so Italy's GDP is expected to fall by 17% in the 2nd quarter. Most likely, in the next 5 years, the Italian economy will not be able to return to pre-crisis levels, in which in just a year, GDP may sink by 11.5%, and next year may grow by only 7%. After which, the pace of recovery will again slow down to 1-2% per year.
With regards to the technical picture of the EUR/USD pair, the bulls will most likely be active today, and all focus will be directed to a movement towards the 14th figure. If the quotes successfully reach it, risky assets will undergo a large bullish impulse which will push the quotes in the area of highs 1.1460 and 1.1520. But if demand on the euro declines, which can happen today after the release of important macroeconomic data, support will shift to the level of 1.1300, and the movement mentioned above may not occur. The most important data for today is the report on the US inflation which, if it comes out better than the forecast, a rise in the quotes should be expected. However, if it comes out worse than the forecast, demand for the US dollar will increase instead, but it will not lead to a change in the current trend, at least until the pair is trading above 1.1255.
GBP/USD
The British pound went on a decline amid news that the United Kingdom will undergo problems after the coronavirus pandemic. In addition, the issue of trade relations with the European Union remains unresolved, which can seriously affect the economies of both countries in the future.
Another problem for the pound is the decision of the Bank of England on monetary policy, which may be the introduction of negative interest rates in August. However, most experts believe that its decision will still be made to resort to more aggressive quantitative easing (QE), and the recent statements of Andrew Bailey confirm this. Bailey said that the current level of interest rates is already close to zero, so there are not many tools available to control the situation. If the economy does not continue to respond to the measures taken, the Bank of England will most likely continue building up the aggressive measures of quantitative easing.
As for the technical picture of the GBP/USD pair, the bull market has ended, since a double top has formed, which is clearly visible on the lower time frames. Now, the goal of the bears is to break through the area of 1.2510, the success of which will lead to a new bearish impulse that would short the pair in the area of lows 1.2440 and 1.2360. The bulls can only hope that the quotes will return above the resistance level of 1.2620, since only after it will the upward correction continue.
