Euro and pound fell on Monday partly due to the absence of macro statistics. Another reason is the reluctance of buyers to continue their active actions without clearer guidelines. But what really drove the market was the GDP forecasts from central banks. For example, the Bank of England gave optimistic projections, which made many analysts cast doubt on the need for significant tightening of policy in the coming years. Accordingly, this affected pound since the longer policy changes are delayed, the weaker demand will be.
Bank of England forecasts say inflation will reach 4% this year, and then slightly exceed that level in early 2022. But Bloomberg analysts believe that by the end of 2021, inflation will only grow to 3.3%. Then, in 2022, it will reach 3.5%. They also expect the ongoing surge in prices to be temporary, so it is unlikely that the central bank will rush to phase out stimulus measures.
In the United States, consumer prices reportedly slowed down after growing sharply in the previous month. This discouraged traders from buying dollar in the hope of imminent changes in the Fed monetary policy. The Department of Labor said CPI rose only 0.5% in July after jumping 0.9% in June. And, compared to the same period in 2020, the index increased by 5.4%. As for core inflation, which excludes volatile categories, a 0.3% gain was observed.
Going back to the Bank of England, members did not make policy changes last week, explaining that although some changes are needed to prevent overheating, inflation needs to be steady first around 2%. And so far forecasts are pointing at a decline to 1.8% by the end of 2022, which means that a rate hike will occur only at the beginning of 2023. But if everything goes worse, an increase will only happen at the end of 2023.
With regards to GBP / USD, a lot depends on 1.3830 because slipping below it will result in a further plunge to the base of the 38th figure, and then to 1.3770. But if bullish traders manage to push the pair above 1.3880, price will jump to the 39th figure, or even to 1.3950.
On a different note, rising COVID-19 infections are mediating further inflationary pressures and rising prices, which poses another challenge to supply chains. Now, there are problems with the functioning of factories and ports in Asia, which clearly goes against the plans of the governments. The only thing that reassures investors is that the issues are not permanent nor stable. But the outbreak did exacerbate the situation of exporters, as shipping costs were sky-high due to a shortage of containers and problems with access to raw materials. In fact, a container port was partially closed in China, while in Southeast Asia, business executives have suspended production of electronics, apparel and a host of other goods.
As for Europe, an interesting report was published yesterday, which indicated that this year, Italy and Spain will demonstrate record growth rates for more than four decades. This will surely help countries overcome the deep recession that started last year. Spain is projected to post a 6.2% GDP growth this 2021, while Italy is predicted to observe a 5.6% increase in the indicator. These can help both countries deal with their debt crises.
But even though the forecasts show positive growth, much still depends on the development of coronavirus, as well as the funds for projects that will improve medium-term growth prospects.
In the United States, manufacturing activity in New York is reported to have fallen significantly to 18.3 points in August, from 43.0 points in July. But the New York Fed said companies remain optimistic about improving conditions over the next six months, as they expect significant increases in employment.
With regards to EUR/USD, a lot depends on 1.1765 because climbing above it will provoke a larger jump towards 1.1830 and 1.1860. But if bearish traders manage to push the pair lower, price will drop to 1.1740 and 1.1700.
