The sharp collapse of the US stock market continued on Friday, which pulled down the British pound. The euro was the only one left to demonstrate strength against the expectations of market participants to reduce rates by the Federal Reserve. However, the strengthening of the euro is a very dangerous trend. It can be said that risky assets were underestimated, and this is the correct reasoning, but the further rapid growth that we observed in the last days of February is unlikely to continue. It must be understood that the sharp increase in the number of coronavirus infected in Europe over the past week increases the risk of recession in the eurozone, and today's data on production activity in eurozone member countries can only confirm this. And if the US has much to lower rates and how to stimulate the economy, the European Central Bank has much less such resources, given the zero refinancing rate and negative deposit rates.
The main problem for the global economy remains a sharp decline in exports and disruptions in the logistics chains. A sharp decline in stock markets indicates a decline in business sentiment, which will lead to a reduction in investment in the future. At the weekend, Bank of America already revised its forecasts for world GDP growth due to the effects of coronavirus. The global GDP is expected to rise to 2.8% from 3.1% earlier while China's economy may slow down to 5.2% from 5.6% earlier.
On Friday, many market participants also expected statements by Federal Reserve Chairman Jerome Powell, who reassured investors and business circles a bit in his speech. Powell also said that the fundamentals of the US economy remain strong, but the coronavirus carries evolving risks to economic activity. The Fed will continue to closely monitor the situation and possible consequences for the prospects for the economy. However, there was no discussion that the committee could lower rates already at the first meeting in the spring of this year.
As for fundamental statistics, it confirms the words of the Fed chairman once again. A report was released on Friday that showed that US household incomes increased significantly in January 2020. Growth was observed in consumer spending. According to the US Department of Commerce, household spending in January rose 0.2% from the previous month. At the same time, personal income growth was much higher and amounted to 0.6% last month. Economists had forecast a 0.2% increase in spending and a 0.4% increase in revenue. The data only confirms the stability of the American economy, but do not forget that current indicators do not take into account the sharp outbreak of coronavirus, which will certainly affect American spending in the future.
On the other hand, the Chicago PMI Procurement Managers Index increased in February 2020, but activity continues to decline. According to the report, Chicago's PMI rose 6.1 points to 49.0 points from 42.9 points in January. Let me remind you that index values below 50 points indicate a decrease in activity. Economists had expected the index to reach 46 points in February, particularly the growth of production sub-indices and the supply index.
A positive impact on the US dollar and the Americans' assessment of the state of the economy in February this year, improved. However, concerns about the spread of coronavirus have greatly increased. According to a University of Michigan report, the final consumer sentiment index in February 2020 rose to 101.0 points from 99.8 points at the end of January. Economists had expected the index to be 100.8 points. The consumer expectations index, which marks the respondents' assessment of future economic conditions, increased to 92.1 points from 90.5 points in January. Meanwhile, more than 8% of the respondents surveyed expressed concern about the coronavirus epidemic.
Even before Fed Chairman Jerome Powell made a speech during his speech, President of the Federal Reserve Bank of St. Louis James Bullard said that lowering rates would be possible only if the situation with coronavirus worsens, while there is currently no such need. According to Bullard, the economy continues to benefit from lower interest rates in 2019, and the lower yield of bonds, whose price jumped sharply against the backdrop of a stock market crash, is supporting the economy.
As for the technical picture of the EUR/USD pair, an emphasis should be placed on resistance 1.1067, a breakthrough of which will lead to new purchases of risky assets in the region of highs 1.1100 and 1.1160. If pressure on the euro returns after weak reports on manufacturing activity in the eurozone countries, major buyers of the trading instrument will show themselves at the lows of last Friday in the area of 1.0960, but before that, the bears need to cope with the support of 1.0990.
GBP/USD
The British pound lost more than 150 points at one point on Friday, but buyers were able to partially regain their positions by the close of the day. Mostly, the pressure on the pound is due to concerns that trade negotiations between the UK and the EU will be tough. The start of negotiations, which will start today, may put more pressure on the pound, as the parties will demonstrate the principle of their positions. Fear of the effects of the coronavirus epidemic on the UK economy also keeps the pound in the bear channel. However, it is expected that a new trade agreement will be reached despite fierce negotiations. But then, most important issues will be postponed until later. This, of course, will support the British pound, which has just increased after a period of uncertainty with Brexit.
As for the technical picture of the GBP/USD pair, the buyers will return to the market only after the trading instrument regains the resistance of 1.2855, lost last Friday. We only expect active purchases above this trading range in the expectation of updating areas 1.2930 1.3000. While maintaining pressure on the pound, support will be formed in the area of 1.2770-65, where the lower border of the new ascending channel will be located.
