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12.08.2020 02:04 PM
GBPUSD and EURUSD: The UK economy will only return to normal by the end of 2021. The US dollar has taken a course to strengthen its positions against a number of world currencies

The pound left without much optimism the fact that the UK economy in the 2nd quarter of 2020 showed a slightly slower contraction than economists had predicted. Despite the fact that the coronavirus pandemic in Europe has caused it the most serious damage, many experts predicted such figures, which was not news beyond the scope.

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The report shows that the UK GDP in the 2nd quarter decreased by 20.4% compared to the previous quarter, and this corresponds to a fall of 59.8% year-on-year. And despite the fact that the UK economy is currently recovering against the backdrop of easing restrictive measures and returning companies to their usual mode of operation, a number of economists expect the economy to fully return to pre-crisis levels no earlier than 2023. Only one Bank of England has stated that it will take 1.5 years for the economy to compensate for losses incurred during the pandemic.

A record drop was registered in the reduction of household expenditure in the UK. The indicator in the 2nd quarter of this year fell immediately by 23.1% compared to the previous quarter. Manufacturing production fell by 20%. The service sector lost about the same amount.

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Now all the focus is on the 3rd quarter, when deferred consumer demand will provide real support to the economy, but what will happen next with the momentum, we can only guess, as the prospects for the labor market are only getting worse, and the program of support for the labor market ends in October this year. It is likely that the Bank of England will have to take new measures to support the economy after the pandemic. Additional fiscal incentives will also be required. Whether this will lead to the introduction of negative interest rates, which the British regulator so disavowed at the last meeting, is still unknown. But it is already clear that the UK economy has entered the deepest recession in history and it will be very difficult to get out of it.

From a technical point of view, nothing has changed for the GBPUSD pair today. The further direction of the pair will depend on how the bulls cope with the support around 1.3020. Today's good GDP data for the UK has allowed the bulls to defend this level. Now you need to return to the middle of the channel 1.3105. When the minimum of 1.3020 is broken, it is best to open short positions on the trading instrument in the expectation of a return to the support of 1.2940.

EURUSD

The euro strengthened slightly after a good report on the growth of industrial production in the Eurozone, which showed a very strong recovery in June this year. However, it is not yet possible to talk about a return to the level that was observed before the introduction of large-scale isolation measures. According to the EU statistics agency, industrial production in the Eurozone in June increased by 9.1% compared to May. A very strong recovery in the automotive industry allowed us to lay a high probability of growth in the future.

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However, do not forget that today there are data on the growth of inflation in the United States. Good indicators that go beyond the forecasts of economists will indicate that the Fed will have to change its attitude to interest rates in the distant future, which will affect the yield of bonds, which will now gradually return investors. This will lead to an even greater strengthening of the position of the US dollar, which can now be observed in the market. The recovery of the US economy and the decline in the number of COVID-19 infections in August this year also contributes to a slight increase in the US dollar against other major currencies.

As for the technical picture of the EURUSD pair, the rate of strengthening of the US dollar will remain, and for this, sellers of risky assets in the EURUSD pair need to protect the resistance of 1.1775, just above which the upper border of the downward correction channel passes. A break in the support of 1.1700 will only increase the pressure on the trading instrument, which will push it to fresh lows in the area of 1.1640 and 1.1580.

Jakub Novak,
Analytical expert of InstaForex
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