On Wednesday morning, Asian stock exchanges traded in the green zone amid reports indicating that a US delegation led by Robert Lighthiser was sent to China to resume trade negotiations. On the eve of the S&P 500 added 0.66% after fixing above 3000p, the NASDAQ rose by 0.58% while the yen continued to decline, which clearly indicates positive growth.
EUR/USD pair
The ECB has been preparing markets for at least a couple of months to ensure that a new incentive program will be launched soon. Mario Draghi, chief economist at Lane, and Benoit Coeure have repeatedly spoken in favor of further easing of monetary policy.
The main intrigue lies in the timing of the start of the new program. A generally positive latest economic data gives reason to postpone the start of the new program until September when updated macroeconomic forecasts will be published. Also, in this case, the ECB will be able to respond to the actions of the Fed.
However, some circumstances, including a high degree of uncertainty in macroeconomics and world trade, the lack of positive dynamics in core inflation, and a very low level of inflation expectations, may force the ECB to take action on Thursday.
Today, new PMIs will be published by countries in the eurozone. A weak data may increase the chances of starting a stimulus program (stronger ones - to transfer active actions to September) as early as Thursday. Uncertainty is high and there is no consensus in the markets.
The only thing the markets are more or less sure of is the content of the future program. It is assumed that the ECB will reduce the rate on deposits, launch a new asset repurchase program and strengthen the forward management. In favor of the start of the program can serve as an early departure of Draghi, the adoption of a new program with his leadership can expand the space for maneuver for Christine Lagarde, who will come to replace him.
The impact of the proposed measures on the euro is also not yet obvious. A liquidity buyout of 30–40 billion a month will not lead to a decline in the euro, as the scale of the measures that the Fed is preparing is unclear and how these measures will affect dollar liquidity. In the meantime, it should be assumed that the announcement of a new incentive program will help EUR/USD decrease at least until July 31 and a move to 1.1106 is very likely that in the long term. It will pave the way to 1.0710/40 if the Fed limits itself to reducing the rate by a quarter of a point.
GBP/USD pair
The announcement of the victory of Boris Johnson in the election of the leadership of the Conservative Party did not cause a reaction from the markets since it was already included in the quotes. On July 25, the House of Commons goes on holidays already until September 3. Therefore, the political factor will noticeably reduce its impact on the volatility of the pound.
The main driver for the pound will be an assessment of whether Johnson will have time to submit a plan for Brexit before October 31 or the matter will move to the next shift of the deadline. Any form of a deal with a high probability will allow the UK to trade with the EU at the old tariffs, which is bullish for the dollar. Brexit without a deal is completely unhappy with the House of Commons and may result in an expression of no confidence in the government.
The Bank of England has no room to maneuver in the current environment. There is a risk of lower inflation in the coming months, which will increase the chances of a rate cut at the end of the year.
In addition, there is a clear slowdown in PMI, therefore, the deterioration of trading conditions (as will be the case in Brexit without a transaction) will force the Bank of England to take stimulating measures.
Thus, there are no objective prerequisites for the growth of the pound in the coming days. A clear indication of the Brexit deal should appear, so that the pound can be strengthened. By the end of the week, the GBP/USD pair will drift to the support of 1.2380 and resistance at 1.2505/15. However, a pullback to it and more so a passage above is unlikely.
