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23.11.2020 11:58 AM
EUR/USD and GBP/USD: Germany is ready to overspend. UK government is testing a new method to fight the coronavirus

Demand for risky assets fell late last week after Poland and Hungary blocked the approval of the EU recovery fund. Apparently, the two parties disagree that the fund's availability is conditional on the rule of law.

Aside from that, the latest reports on the eurozone economy were weak, thereby indicating a slowdown in economic growth and recovery. The drop in consumer confidence, which negatively affects household expenditures, has led to a wait-and-see attitude and an increase in savings.

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Regarding the issue on the EU recovery fund, negotiations have already begun, however, it will most likely be completed only on the EU summit scheduled for December 10-11. Neither Poland nor Hungary can afford to be left without financial support, thus, the governments of these countries are unlikely to seriously balk, which means that the existing differences will be quickly resolved.

Another important news is the current state of Germany's economy, which, according to recent reports, have shrank sharply. Because of this, the government is no longer adhering to austerity measures and has quickly moved from a supporter of asceticism to a leader in spending. The current COVID-19 crisis is to blame, as it has led to an increase in government spending aimed at supporting the economy. Significant changes in the country fiscal policy once again prove the seriousness of the problem faced by Germany and other European countries.

In fact, the amount of budget that Angela Merkel's government is currently promoting speaks for itself. Although Germany is far from being among the leaders in coronavirus infection, the government's support for the population and business is quite serious. It seems that the "frugality" in earlier years allowed increasing government spending without serious problems.

Already, the government of Chancellor Angela Merkel is asking lawmakers to approve a spending plan for next year, which increases the planned new national debt by about 70% to cover the effects of the coronavirus pandemic. According to the document, the government is seeking approval to increase net new borrowing by € 160 billion against € 96.2 billion in the latest version. The document states the majority will have to help companies trying to survive under the restrictions imposed by the government. During the interview, German Finance Minister, Olaf Scholz, said the partial restrictions on the country's economy, which are in force in November this year, may have to be extended in December. In this case, it is necessary to expand financial support for companies and businesses.

In another note, a number of economic data were published for the euro area last Friday, however, the only thing that attracted attention was the report on consumer confidence. According to the report published by the European Commision, the index continued to decline in November, reaching a value of -17.6 points from -15.5 points in October. This was already expected though, since most of Europe is in a partial lockdown again. But if the measures are extended until December, further decline in the figure can be expected.

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As for the EUR/USD pair, everything depends on whether the bulls manage to break above the monthly high of 1.1900, as only such will increase demand for risky assets, opening a straight path to highs at 1.1960 and 1.2010. However, if the quotes return to the level of 1.1820, the EUR/USD pair will collapse to 1.1760, and then to the base of the 17th figure.

GBP/USD

The pound rallied amid news that Brexit negotiations have resumed remotely. However, until now, no progress has been made on the issue with fishing. Only a compromise on this problem will lead to the sharp strengthening of the pound towards new highs, but in the meantime, pound bulls are aiming to protect the level of 1.3310. As long as the quote remains above this range, the GBP/USD pair can be expected to rise to the highs of 1.3380 and 1.3470. But if the quote declines below 1.3235, the pair will go to the level of 1.3165, and then to the base of the 31st figure.

With regards to the COVID-19 situation in the UK, over the weekend, it was reported that Prime Minister Boris Johnson plans to hold mass testing for coronavirus as part of a program to re-introduce multi-level restrictions instead of a nationwide lockdown. The current partial lockdown in the UK ends on December 2, and Johnson announced that regular checks will be carried out in areas with the highest incidence of the disease. People who have been in contact with carriers of the virus will be able to avoid quarantine, but they will have to be tested every day for seven days in a row. The effectiveness of this program will determine the further steps of the UK government in the fight against the coronavirus.

Johnson said that even if COVID-19 incidence in the country is declining, the problem remains at a fairly high level. The UK government expects that mass testing, plus the arrival of vaccines and the deployment of a regional tiered disease control system, will help bring the virus back under control and contain it.

Jakub Novak,
Analytical expert of InstaForex
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