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27.03.2020 10:12 AM
Coronavirus highlighted the weakness of the US economy (review of EUR/USD and GBP/USD on 03/27/2020)

This week has already been marked by new historical records. However, it was negative since such a rapid decline in business activity indices has never been seen before. And the very values of these same indices, at least in the service sector, are recorded for the first time in history. But in general, what happened yesterday was hard to understand. The only thing that comes to our mind is a comparison with the Great Depression. Another thing is that the market reacted somehow modestly, and we did not see a panic sale of the dollar. Apparently, they are still trying to realize what happened. Perhaps, many do not believe and believe that this is some kind of mistake that will be fixed soon and maybe someone believes that this is just an accident, and now everything will be as before. After all, it is difficult to believe in the reality of what happened.

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At the same time, strangeness started already in the morning, as the market was really preparing for very poor labor market data in the United States. The fact is that, despite the lack of growth in retail sales in the UK, the pound increased. But essentially, it is a question of slowing down the growth rate of retail sales from 0.9% to 0.0%. It was expected that the growth rate would remain unchanged. But, despite such poor results, this did not stop the pound from further growth. Meanwhile, the meeting of the Board of the Bank of England, of course, did not interest anyone at all. All decisions were made during an emergency meeting, and yesterday's gatherings could have been canceled altogether. As the Federal Reserve did. But the Board of the Bank of England still decided to get together and talk about something. However, about what, it is completely unclear. So this event just went unnoticed.

Retail Sales (UK):

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The situation in the lending market in Europe is somewhat mixed. On the one hand, consumer lending growth accelerated from 3.7% to 3.8%, while they expected a slowdown to 3.6%. But the joy of the activity of ordinary Europeans was blocked by sadness regarding European business, whose lending growth rates slowed down from 3.2% to 3.0%. However, they were expecting a slowdown, but only up to 3.1%. So in a good way, the single European currency had no reason for either growth or decline. Nevertheless, it continued to grow against the backdrop of expectations of American statistics.

Consumer lending (Europe):

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All this naturally fades amid what happened with applications for unemployment benefits. It is a pity that we do not have the same detailed statistics on the period of the Great Depression, since it would be nice to compare what happened then and today. In fact, everyone was expecting that the number of initial applications for unemployment benefits would increase from 282 thousand to 1,090 thousand. This figure itself was already terrifying, since such a large number of initial applications had never been recorded. Previously, only in the worst times, only a little more than half a million requests were recorded. And here immediately a million. But it turned out to be much worse, as the number of initial applications for unemployment benefits was 3,283 thousand And this is not just any record. After all, the number of initial applications has never exceeded the number of repeated ones, and even according to the most terrible forecasts, and should not have. But the number of those same repeated applications for unemployment benefits increased from 1,702 thousand to 1,803 thousand. So two historical records were set at once. For the first time, the number of initial applications exceeded the mark of one million, and even with a huge margin and also for the first time in history, the number of initial applications exceeded the number of repeated ones. A similar surge itself is possible only if small and medium-sized entrepreneurs massively declare themselves bankrupt. Apparently, the coronavirus epidemic led to a massive outflow of customers at all kinds of small shops, bars, cafes, beauty salons and the like. In short, it is small companies operating in the service sector that are faced with the instant disappearance of customers, and hence revenue. At the same time, this happened extremely rapidly, since the report on March 21, and since then the number of infected has almost tripled. According to Johns Hopkins University, the number of confirmed cases of coronavirus in the United States was 27.6 thousand on March 21. Now this number has grown to 86.0 thousand. That is, the situation is only getting worse, and we should expect further unemployment to increase. But this situation itself shows how vulnerable the American economy is, since small and medium-sized businesses have no margin of safety at all and, with the slightest breeze, the breeze pours like a house of cards. I repeat, this data is only at the beginning of the spread of coronavirus in the United States. Since then, the situation has worsened at times. And we already see a simply unimaginable picture. It turns out that American business is more reminiscent of an addict who sits on the needle of cheap loans, and if only the flow of customers and revenue decreases slightly, how all these loans have nothing to provide, and massive bankruptcies begin. But if American business itself is such, then the whole American economy too. Just at the first stage the smallest and weakest ones collapsed. And this is only at the very beginning. It turns out that it will only get worse. And it will not be possible to brush aside these data on the grounds that these are only initial applications, and more importantly repeated ones. Like, now all these people will quickly find a new job. No. After all, the labor market never faced such an influx of initial appeals before. Yes, and how to find a job if everyone is afraid to leave the house and behave as if outside the window of a zombie apocalypse. So the situation is really terrifying, and only a refusal to believe my eyes did not lead to a panic collapse of the dollar. But apparently, it will only get worse. And the economy of the United States is so strongly connected with the whole world that it will soon come across even on the most remote tropical islands. At the same time I will make the assumption that without any coronavirus we would see something similar. Maybe not on such a scale, but still. The flight of capital and the collapse of markets have been brewing for a long time. All markets were seriously overheated, and sooner or later profit-taking would begin, with all the consequences of a fall in indices, a collapse in commodity prices and confusion with interest rates. As a result, a shortage of liquidity would begin in the market, especially in the form of cheap and affordable loans. And the collapse of the stock market would inevitably lead to the bankruptcy of many companies. And if the whole economy is on cheap loans, then difficulties with refinancing would put very much on the brink of bankruptcy. And we just saw their safety margin. More precisely, its absence. It just had to happen a little later, and a little softer.

Number of Initial Jobless Claims (United States):

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But do not forget that most of the capital circulating in the global financial market is controlled by American investors, and the main driving force in the markets was that they closed all their positions and tried to hide money away. More precisely, at home. After all, if everywhere is scary and hungry, a person tries to protect himself and hide where it seems safer. This place is always your own home. The coronavirus epidemic has launched a process of mass capital flight from all markets and from all countries back to the United States. But no, things are no better in the United States. So where do poor investors run now? After all, if such horrors are already happening in the United States, then it is generally dark in the rest of the world. Believe me, that's exactly what many people think. American society is generally extremely American-centric. Thus, we continue to observe how big capital is conserved in the form of American public debt. It is in it that all these funds exported from all over the world are invested. For example, the yield on 4-week bills fell from 0.03% to 0.00% which is exactly the same numbers for 8-week bills. The yield on 7-year bonds decreased from 1.247% to 0.680%. So American investors are in no hurry to withdraw funds from the United States to somewhere where it seems that the situation is calmer. So, they do not believe that the situation will not develop in other countries according to the American scenario. And of course, amid such dramatic events, no one paid any attention to the final data on GDP for the fourth quarter, which confirmed the fact of accelerating economic growth from 2.1% to 2.3%. Who cares about some kind of fourth quarter of 2019 there now? It was different. Also, wholesale inventories which declined by 0.5% are also not interesting to anyone.

GDP growth rate (United States):

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Naturally, few people are now interested in data on personal incomes and expenses of Americans for February. Yes, both indicators should grow by 0.3%. But after yesterday's data, who cares? The market will continue to analyze what is happening.

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Of course, what is happening in the United States labor market is scary. But do not forget that the situation with coronavirus in Europe is no better and perhaps worse. We just do not see operational data on the labor market. In addition, things are much better with social support measures in Europe, so at first, the situation may turn out to be a little better. But the process of capital outflow, as the dynamics of the debt market shows, does not change at all. Therefore, the general trend to strengthen the dollar continues. Perhaps, this process will proceed a little slower, but the essence of things has not changed. So we should expect a gradual decline in the single European currency to the level of 1.0900.

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The situation is similar with the pound. So the closest reference point is the level of 1.1950.

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Mark Bom,
Analytical expert of InstaForex
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