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10.07.2020 10:37 AM
EUR/USD: The euro declined due to the deteriorating situation in the US labor market.

The good news from the Eurogroup, which was the election of a new president, was overpowered by the weak data on the US market, because it listed that the number of applications for unemployment benefits again jumped by more than a million. This means that recovery prospects for the US have dimmed, and this is due to the escalating second wave of coronavirus in the country. Both the rate of economic recovery and the US dollar depends on how the labor market manifests itself in the current conditions, so the risk of a repeated slowdown in GDP will increase, if the situation on the US labor market does not improve. In addition, a deteriorating condition will raise the demand for the US dollar, which will also increase the value of gold in the trading charts.

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During the meeting of the Eurogroup yesterday, a new president was elected, and he is Finance Minister Paschal Donohoe of Ireland. At his speech, Donoho said that in his tenure as president of the Eurogroup, he will make every effort to save the Eurozone economy. He said that he clearly understands the problems of EU citizens, and these are the worries and concerns about the future because of the risk of job loss and reduced income. In this regard, Donoho said that he will try to lay the foundations of a new economy with his colleagues in the Eurogroup, in order to quickly overcome these current problems. The new president succeeded Mario Centeno, the third president of the Eurogroup, who was elected on December 4, 2017.

Another point that was discussed at the meeting was the views of the members on the economic situation of the Eurozone. They reviewed the interim forecast of the European Commission for the summer of 2020. This is important because the future direction of the euro depends on how the next EU Summit will take place, since it is then that the decision will be made regarding the allocation of assistance in the amount of € 750 billion.

The recent forecast of the European Commission indicated that the eurozone has already entered a recession of unprecedented depth. Although recovery has already begun in the summer, it is too early to give optimistic forecasts for the future, especially without quick and decisive political measures.

Recently, an interesting forecast from Wells Fargo Securities was published, which indicated that the GDP of the eurozone in 2020 will decrease by 7.7%, while a month ago the company forecast a decline of 8.9%. A good increase in activity in June gives hope that the eurozone economy will survive the crisis better than expected, but so far the recovery has occurred only by 75% -80%, after falling due to the coronavirus pandemic. Another surgeon in the number of infections could change the picture for the worse.

In line with this, because of the increasing daily incidence of coronavirus in the United States, the state of the US labor market has deteriorated once again. The report of the US Department of Labor revealed that on the week of June 28 to July 4, the number of initial applications for unemployment benefits has decreased by only 99,000, amounting to 1.3 million. This indicates that the slowdown in reduction has decreased, compared to the records in the previous weeks. Secondary applications from the week of June 21 to June 27 has also decreased.

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Meanwhile, US Treasury Secretary Steven Mnuchin gave a speech and said that he is extremely optimistic about the progress of the vaccine for the coronavirus. In addition, he is awaiting the approval of another round of emergency benefits for individuals, in which together with the US President and the Senate, work is underway to adopt a new law on financial assistance to individuals in connection with the coronavirus pandemic. It is expected that it will be approved at the end of July, and the payment of benefits will remain for employees sent on unpaid leave.

It is no secret that the recovery of the United States depends on the effectiveness and consistency of COVID-19 containment measures. Since the wave of infections is now being observed, it will soon become clear which vector the economy will turn to. Another surge of the virus will certainly stall consumer spending, which will put pressure on the manufacturing sector and the service sector, which have not yet recovered from the crisis.

As for the technical picture of the EUR/USD pair, it seems that the bulls are losing strength because of the current conditions, which resulted to the return of quotes to the support level 1.1265. If activity at this level does not return, a breakout will lead to the further decrease of the pair to the lows 1.1230 and 1.1190. The upward potential will be limited by the resistance level of 1.1320, from which the bears will try to form a new border for the downward price channel.

Jakub Novak,
Analytical expert of InstaForex
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