The European currency declined today during the European session due to the lack of important fundamental statistics, as well as after too much attention of European politicians to the euro exchange rate. Today, ECB Governing Council member Klaas Knot said that the European Central Bank has all the necessary tools, including negative interest rates, to prevent further growth of the euro, observed at the end of last year and the beginning of this year.
"The euro exchange rate is something that we are monitoring very closely," Knot said in an interview today. The euro is an important factor, but not the only one, by which the European Central Bank forecasts inflationary pressures in the future. The more expensive the euro, the weaker inflation will be in the long run.
Let me remind you that this week the European Central Bank announced that it will study in more detail the sharp growth of the euro against the US dollar since the beginning of the coronavirus pandemic. The main point is whether there are significant differences between the monetary policy and the economic stimulus policy of the European Central Bank with the methods used by the US Federal Reserve.
Last year, the single European currency rose almost 9% against the US dollar, the biggest jump since 2017. In November and December alone, despite the introduction of quarantine measures in the EU and a partial lockdown of the European economy, the euro rose by 5% against the US dollar. It is not surprising that such a sharp jump destroys all the plans of the European Central Bank to strengthen inflationary pressures in the euro area this year. The high exchange rate of the euro also hinders economic growth and makes exports of goods less competitive due to their high cost.
Notes did not hide the fact that the ECB always has the opportunity to reduce the deposit interest rate below the current -0.5%, provided that such a need arises.
Let me remind you that the emergency stimulus of the economy through the bond repurchase through the PPEP program now includes 1.85 trillion euros. Also, to stimulate the economy and maintain inflation, longer-term bank loans are issued through TLTRO operations.
As for the US dollar, its current direction will depend on the decisions made by the Federal Reserve System. The US dollar may rise along with US government bond yields, provided that Federal Reserve Chairman Jerome Powell is more positive about the economic outlook in his statement, which he will make immediately after the publication of the monetary policy decision by the US Open Market Committee.
Speculation about a reduction in the bond purchase program at an earlier stage will lead to a strengthening of the US dollar, however, as noted in my morning forecast, this is extremely unlikely. Most likely, the Fed will not change its policy, as low-interest rates are the key to stimulating economic growth in the United States, which reduces the attractiveness of the US dollar.
The lack of clear language in the Fed's statements makes life difficult for investors. That's why the focus is on Jerome Powell's performance. Let me remind you that during its December meeting, the committee said that the Fed will buy assets worth at least $ 120 billion a month until significant progress is made in achieving the goals of reducing the unemployment rate and increasing inflation. Such vague statements increase the risk that markets will misunderstand the Fed's intentions. Even the Fed chairman himself has repeatedly noted that the lack of clarity in the timing of the curtailment of the asset purchase program is itself a risk to financial stability. So we'll see how the Fed chairman handles this today when it's time to shed some light on the situation in the future.
Now let's talk a little bit about the figures that were published today in the morning.
According to the results of a study conducted by the research company GfK: consumer confidence in Germany, in February 2020, will continue to decline due to strict restrictions, which will continue until at least the middle of next month. The report indicates that the consumer sentiment index fell by 8.1 points to -15.6 points in February from -7.5 points in January this year. Economists had expected the figure to be -7.9. The closure of restaurants, catering establishments, and retail outlets, together with the paralysis of the retail sector, had the same devastating impact in December last year as in the first wave of the spread of coronavirus infection. Gfk noted that the recent decision to extend strict isolation measures destroyed all investors' hopes for an early recovery in consumer sentiment and a more active pace of economic growth in the 1st quarter of this year.
The report on the French unemployment rate was ignored by the market. According to the US Department of Labor, the unemployment rate in France in the fourth quarter of 2020 fell by 2.7% compared to the previous quarter. In total, according to the results of the 4th quarter, more than 3 million people in France are looking for work. On an annualized basis, the unemployment rate in the 4th quarter increased by 8.1%.
As for the technical picture of the EURUSD pair, it will be possible to talk about the continuation of the bullish trend in risky assets with a confident breakdown of the resistance of 1.2190, which will open the way to the highs of 1.2230 and 1.2280. The bears are still trying to regain the level of 1.2140, which is now the middle of the side channel. However, only in the event of a breakout of the minimum of 1.2110, the risk of a larger decline in the euro will increase. In this scenario, we can expect a decline in the trading instrument to the lows of the year in the area of 1.2055 and their update in the area of 1.1980.
The British pound continues to knock on annual highs in a pair with the US dollar, and also steadily strengthens against the euro. Many investors are beginning to believe that the relatively high level of vaccination against COVID-19 in the UK should allow the economy to return to strong growth much earlier than expected. The sooner the quarantine measures are curtailed, the sooner the "thaw" in the economy will come. A recent UK government report shows that as of January 26, 2021, more than 6.8 million people in the UK have received their first vaccination. At the same time, the number of deaths from COVID-19 exceeded 100,000. The active recovery of the pound once again proves the fact that investors are betting on its further recovery this year, even despite all the problems that the economy is facing at the moment.
Today, a report by the British Consortium was published, which once again contained figures indicating a slowdown in inflation in the UK. According to the data, prices in UK stores fell in January this year by 2.2% year-on-year, after a similar drop of 1.8% in December 2020. However, it should be understood that the red tape associated with Brexit, the rising cost of delivery, and the general jump in food prices in the world, may increase price pressure in the near future.
As for the technical picture of GBPUSD, to maintain the bull market, it is necessary to protect the support in the area of the 37th figure. Only this will allow you to get to the annual maximum of 1.3745 and update it, reaching the levels of 1.3805 and 1.3870. If the bulls fail to meet the target today, the pressure on the pound will return. A break of the level of 1.3701 will quickly push the trading instrument into the support area of 1.3635 and lead to a larger downward correction in the area of the lows of 1.3580 and 1.3525.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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