29.10.202015:50 Ανάλυση και κριτικές Forex: EUR/USD and GBP/USD: ECB stands pat on monetary policy, delaying crucial decisions until December. GBP weighed down by Brexit uncertainty, COVID-19, and risks of imposing negative interest rates

Today the ECB stood pat on all settings of its monetary policy. The regulator announced that the key policy rates remains at 0.0% and the deposit rate is left at -0.5%. The ECB has not changed the bond-buying program. It is running as a financial aid program to the ailing eurozone's economy which is not able to recover from the fallout of the first pandemic wave.

Exchange Rates 29.10.2020 analysis

The ECB policy update reads that the regulator is ready to ensure favorable financial conditions and adjust all of its fiscal tools when necessary. The Pandemic Emergency Purchase Program (PEPP) launched in March 2020 was left unchanged at 1.35 trillion. So, the ECB will carry on with its bond purchases until June 2021 when the coronavirus-driven crisis is likely to complete. As for the Asset Purchase Program (APP), it also remained unchanged with a monthly purchase volume of 20 billion. In the forward guidance, the regulator said that interest rates would be put on hold at the current or even lower levels until inflation firmly reaches the target level that is long-distant prospect. Such outcome is beneficial to speculative buyers of risky assets because they were braced for monetary easing today. Now investors are alert to a press conference of ECB President Christine Lagarde who could shed light on the central bank's approach to the COVID-19 resurgence when advanced European economies are tightening restrictions.

Eventually, the ECB pledged its commitment to provide favorable financial conditions and to revise its outlook in December.

Exchange Rates 29.10.2020 analysis

When it comes to the economic calendar, a report on economic sentiment in the Eurozone for October did not tell anything new. The business sentiment index did not improve and consumers' sentiment turned sour in October. This comes from the pandemic resurgence which forced authorities to tighten restrictions on businesses and daily people's lives. According to a report by the European Commission, am economic sentiment index for the Eurozone remained flat at 90.9 in October.

Yesterday, German Chancellor Angela Merkel announced a partial lockdown. Economists have already reckoned the costs entailed by such restrictive measures. The worse-case scenario says that a new nationwide lockdown could slash a GDP by nearly 1% provided that restrictions are lifted at the end of November. Previously, Angela Merkel announced that the authorities would shut restaurants and bars from November 4 due to soaring numbers of coronavirus cases. At the same time, stores, school, and kindergartens will remain open. Besides, theatres, sports clubs, and cinemas are also suspended for 1 month. Hotels are not allowed to accommodate foreign tourists. Angela Merkel believes that such measures are introduced to prevent the emergency situation in healthcare. The restrictions are not overcautious, but mandatory measures amid record high daily rates of new infections.

Although today's report on the unemployment rate in Germany in October was better than the forecasts, it did not help the European currency much. According to the Federal Employment Office, in October 2020 the number of applications for unemployment benefits in Germany fell by 35,000, while economists had expected the number of applications to fall by 5,000. The unemployment rate edged down to 6.2% from 6.3% in September. It is not difficult to conclude that a new wave of coronavirus infections at the end of October will surely stall the decline in the unemployment rate and might lead to its rise again.

As for France, yesterday President Macron also announced the introduction of the nationwide lockdown. Economists have already calculated the losses that would be inflicted by such restrictions. Experts estimated that due to strict lockdown measures, the country's GDP may lose from 1% to 2% in Q4 this year, depending on how long they are in effect.

The technical picture of EUR/USD is complicated as the pair is set to trade under higher volatility during the press conference by ECB President Christine Lagarde. The crucial level for the buyers is still seen at near 1.1690. Its breakout will trigger a new sell-off of risky assets. Today's local high of 1.1760 is still acting as resistance. If broken, this will open the door towards 1.1800 and 1.1840.


Meanwhile, the British pound is losing ground against the US dollar amid the lack of news on the Brexit trade agreement, which has been in talks all week. Lots of analysts do not believe in a compromise between the parties. So, there are rumors that at the policy meeting scheduled for November 5, the Bank of England is likely to downgrade its forecasts for the second half of 2020 and soften monetary policy. And this will hit the value of the British pound, which is already on the verge of a major fall due to uncertainty with Brexit and rising rates of COVID-19 cases in the UK. Another Brexit-related pain will clearly force the Bank of England to take more drastic measures, since the expansion of the asset purchase program alone will clearly not be enough. At the same time, the British regulator may follow the example of the ECB, taking a short pause for thoughts. The introduction of negative interest rates anticipated by investors for a long time will require a new approach from the central bank because such a decision will be made for the first time. So, it is necessary to carefully weigh everything.

Earlier, the Bank of England projected that the UK GDP in Q4 2020 would be 5% down from a year ago. Nevertheless, the central bank expected economic expansion by the end of 2021. Nowadays, the regulator is more down to earth. The tough reality makes it downgrade the economic outlook for late 2020 and early 2021. This is bearish for the sterling.

The technical picture of GBP/USD tells us that the bears are one step away from a retracement to the major psychological support of 1.2865 which has been tested at least 4 times this month. The 5th test of this level could be fatal, thus terminating stop orders of the sterling bulls and pushing the pair towards new lows of 1.2750 and 1.2640. The bullish trend could be resumed only after a breakout of 1.3060 that will open the door towards one-month highs of 1.3120 and 1.3175.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Jakub Novak,
Analytical expert
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