Demand for the euro declined after the ECB published the minutes of its last meeting, during which it was pointed out that rather high disagreements remain within the bank's management with regards to the timing and volume of its bond purchase program.
Just recently, the ECB agreed to increase its PEPP emergency assistance program by € 600 billion euros and extended its validity until June 2021. However, some executives advocated to wait for new data, pointing out the need to have more time to make an accurate forecast on the medium-term prospects and situation of the economy. But there are also those who believe that it is necessary to increase the program more significantly, as there are risks of a second wave of coronavirus, coupled with the generally weak state of the economy, as well as disappointing prospects of inflation.
Such division strengthened the idea that the German Supreme Court will be dissatisfied with the rationale of the bond purchase program, putting forward the possibility of the German central bank pulling out its cooperation to the program. Recall that the supreme court already suggested such action last spring, when it questioned the need of ECB's large-scale program.
As for forecasts, the ECB predicts the eurozone GDP to decline by 9% this year, which is one of the optimistic scenarios that do not take into account the occurrence of a second wave of coronavirus pandemic. Thus, if a re-outbreak occurs, financial conditions will deteriorate even further, which will require stronger monetary measures to recover. Unfortunately, such a scenario will intensify the serious disputes currently happening within the ranks of the ECB.
Meanwhile in the US, a weak report on the labor market, which came out yesterday, fueled the demand for the US dollar. According to the data, initial applications remained at a historic 20 million, increasing by 1.5 million during the reporting week. Although the figure is slightly lower than the record earlier, the possibility of a second outbreak risks a surge in the number of unemployed for the upcoming weeks. Another outbreak will cause the implementation of another quarantine restrictions which will hinder the return of people to work as well as instigate another jump in unemployed figures in the country. As for secondary applications, 19.5 million was recorded from the week of June 7 to June 13.
The contraction of the US economy in the 1st quarter of this year fully coincided with the forecasts of economists. According to the report published by the US Department of Commerce, GDP in the 1st quarter of 2020 fell by 5.0% per annum, the same as what experts predicted. The decline is mainly due to the drop of costs of consumers and companies prompted by the coronavirus pandemic.
Meanwhile, the improving figures of orders for durable goods in the United States greatly pleased traders. The rise started after quarantine restrictions were lifted, in which supply chains and new orders recovered. According to the data, orders for durable goods in May grew by 15.8% compared with the previous month, up from economists' forecast of 9.8%. New orders for transportation equipment jumped 80.7% in May, while orders excluding this category jumped 4%.
Good data on production activity in the area of Kansas City Fed also did not go unnoticed. The rise of figures in June occurred due to the removal of quarantine restrictions in the country. According to the report of the Kansas City Fed, the composite index in June rose to 1 point from its -19 points in May, while economists predicted the indicator to just be -8 points.
However, despite good and improving data, the expectations of the White House and the Federal Reserve will not be met since it is already clear that the US economy is under a longer and slower recovery from the bottom. According to the report of S&P which was published yesterday, the US economy will take at least two years before it can reach its pre-crisis levels. The main problem will be unemployment in the United States, which will remain high enough that will affect consumer spending and the restoration of business demand. The high likelihood of a second wave of the pandemic will also limit economic growth, so the US GDP is expected to decline by 5.0% this year, and grow by only 5.2% in 2021.
Robert Kaplan, president of the Dallas Fed also agreed to such forecasts. According to him, GDP will decline by 5% this year, and unemployment is likely to be 8% -10%. These figures are the average forecast among most leading economic agencies, including the Fed. Kaplan also expressed doubts that the United States has passed the peak of the coronavirus pandemic.
As for the technical picture of the EUR / USD pair, demand for risky assets will most likely remain low today, in which a breakout from the support level of 1.1200 will provide the bears a comfortable advantage which will quickly push the quotes into the area of Lows 1.1170 and 1.1100. However, the bulls can quickly seize the control in the market, and for this, they will need to breakout the quotes and consolidate above the resistance level 1.1235. The success of it will provoke the demolition of a number of sellers stops, which will lead to a rapid increase to the area of highs 1.1280 and 1.1230. ECB head Christine Lagarde will also conduct a speech today, during which she will discuss economic prospects and several predictions for the future. If Lagarde mentions the emergency assistance program, demand for risky assets will continue to decline.
*Prezentowana analiza rynku ma charakter informacyjny i nie jest przewodnikiem po transakcji.
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