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16.10.2019 10:06 AM
Emotions and only emotions (A review of EUR/USD and GBP/USD on 10/16/2019)

The ineradicable belief in a brighter future continues to move the pound up. As soon as Michel Barnier, who plays the role of the European Union's chief negotiator in this comedy, said that the negotiations are going very, very well and that a version of the agreement that suits everyone can be ready on Friday, as this gave the pound new strength. The emotions are so overwhelmed that no one paid attention to such a trifle as the fact that the summit of the heads of the countries of the European Union will end a day before the indicated date. In other words, they will prepare an agreement, but it is completely incomprehensible when they will consider it on the merits. However, the faith in a brighter future does its job.

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At the same time, as it usually happens, excessive emotions blur the view, and the personality gradually breaks away from reality. In addition, judging by how confidently the pound is growing, many investors have long been living in a parallel reality. This is the only way to explain the unwillingness to see how the UK labor market is getting worse. After all, the unemployment rate did not remain unchanged, but rose from 3.8% to 3.9%. The growth rate of average wages including premiums slowed down from 3.9% to 3.8%, but in fact the slowdown is stronger, as the previous results were revised for the worse from 4.0%. Initially, it was assumed that the average wage growth rate, taking into account premiums, would remain at 4.0%, while only the data on average wages excluding premiums could please a little, as their growth rate slowed down from 3.9% to not 3.7%, and up to 3.8%. At the same time, the previous value was revised for the better with 3.8%. However, the bottom line is a clear deterioration in the situation on the labor market. Despite this, investors continue to drive the pound up, driven solely by emotions. The higher they drive it, the more painful will be the subsequent, and inevitable, clash with reality.

Unemployment Rate (UK):

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However, it is not necessary to think that things are not only in the best way in Foggy Albion. On the continent, there is also something to think about. After all, the final data on inflation in France confirmed the fact of its decline which is from 1.0% to 0.9%. If inflation is already falling in the second economy of the eurozone, then there is no reason for its growth in Europe as a whole. Thus, the European Central Bank will soon please us with a reduction in the refinancing rate to negative values.

Inflation (France):

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Honestly, we must admit that the dollar has really no reason to rejoice today. Even if we put aside the positive emotions that investors experience from the sweet words of politicians regarding Brexit, the dollar has every chance of a decline. The fact is that in the United States, they forecast a slowdown in retail sales growth from 4.1% to 3.8%. The decline in consumer activity, which is the main driving force of the American economy, is without a doubt an extremely negative factor.

Retail Sales (United States):

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Nevertheless, the final data on inflation will be published in Europe, which should confirm the fact of its decline from 1.0% to 0.9%. Another thing is that these data have already been taken into account by the market after the publication of the preliminary assessment. In other words, a single European currency can grow to 1.1075.

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The pound, on the other hand, has much more reasons for growth, no matter how funny it may sound. The fact is that data on inflation will be published today, which should show its growth from 1.7% to 1.8%. The growth of inflation indicates a high probability of growth in company profits, which is very, very pleasant for investors. In other words, the pound will receive a real reason for growth today. Thus, the possibility of a pound growth to 1.2750 is not ruled out.

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Mark Bom,
Analytical expert of InstaForex
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