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02.12.2020 10:39 AM
EUR/USD and GBP/USD: What caused the sharp rise in the European currency? Meanwhile, pound bulls are anticipating a new upward leap.

Dollar's decline yesterday is understandable. Joe Biden did not officially take office as the new president of the United States, and the movement to provide additional stimulus to the US economy began. Most likely, both leading parties realized that the risk of a second pandemic wave hitting the economy outweighs their personal ambitions. Therefore, during yesterday's speeches, both Fed Chairman Jerome Powell and Treasury Secretary Steven Mnuchin showed their support on adding fiscal measures that would allow the economy to withstand the COVID-19 pandemic.

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Mnuchin and Powell both talked about the need to support the economy, with Powell saying that during a pandemic, the risk of overstimulation is lower than the risk of understimulation. In his opinion, retaining fiscal support would really help the US recover amid economic slowdown due to the second pandemic wave, thus, the Federal Reserve will not raise rates in order to forestall theoretical inflationary risks. It is on these statements that the US dollar underwent pressure once again.

As for Mnuchin, he said that he supports targeted quick measures, including the extension of the bond purchase program and the payment of unemployment benefits. He urged the Congress to take additional measures to support small businesses, saying that his recent decision not to renew some of the Fed's programs was not economic.

Most importantly, both Munchin and Powell expressed support for the bipartisan $ 908-billion bill. Since this summer, the US has been at an impasse due to the provision of additional fiscal assistance, as both Republicans and Democrats cannot agree on this issue. However, it is clear that the rise in COVID-19 cases threatens economic activity, so there is a need to act now. A sharp slowdown in economic recovery could be critical, as it would lead to the need to allocate larger amounts of aid, since once again millions of Americans will be left without work, and the work of enterprises and businesses will be paralyzed.

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But as the latest report from the Institute for Supply Management (ISM) shows, there is little to worry about. According to the data, activity in the US manufacturing sector continued to rise in November, albeit at a slower-than-expected pace. Manufacturing PMI fell to 57.5 points against 59.3 points in October, while economists had expected it to be 58.0 points.

Many Fed representatives also delivered speeches yesterday, but the most attention was given to Mary Daly, who is confident that the economy will need the central bank's help for a long time. However, according to her, an ultra-soft policy creates the risk of financial instability, so changing the current monetary policy is not the best way to deal with economic problems. Although recovery is slowing due to the stubborn rise of COVID-19 infections in the country, she believes the upcoming vaccines will allow the virus to be brought under control, after which economic recovery will be more active.

As for the EUR / USD pair, the current technical picture shows that the large breakout at the 20th figure has pretty much ruined the sellers' plans. A temporary stop at 1.2080 will only irritate new players betting on the strengthening of the euro, especially if the UK and the EU finally signs a new trade deal. Bringing the quote above 1.2085 will allow the euro to reach the highs 1.2140 and 1.2200, but after it the bullish move will slow. In case of a decline in the euro, the first support level is around 1.2040, while the larger one is located at the base of the 20th figure.

GBP / USD

Negotiations between the UK and the European Union are ongoing, with both sides rushing to close a trade deal before January 1, when the UK officially leaves the EU and the transition period ends. Many representatives and officials from both sides are hoping that an agreement could be reached by the end of the week, but while intensive round-the-clock negotiations are moving forward, there are still two major challenges that stand in the way of reaching an agreement ... This suggests that it is impossible to predict what the outcome will be, but both sides are optimistic. Today, preliminary findings from the EU's chief negotiator, Michel Barnier, will be announced, which could lead to a surge in volatility in the British pound. Barnier is expected to brief his 27 EU counterparts on the progress of the talks.

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It seems that both parties want to conclude an agreement before the end of this week to avoid prolonging the negotiations, especially since the EU summit is approaching. However, the strategy of the UK is precisely to prolong negotiations so that it is possible to put pressure on European leaders as effectively as possible, forcing them to make concessions at the last moment.

Thus, in the GBP/USD pair, the chance for a rise is exactly the same as that of its fall, since any surge in volatility will be directly linked to the outcome of the negotiations. Moving above 1.3455 will allow the pound to reach the highs 1.3510 and 1.3570 where the bullish movement can slow, but the target will remain to be 1.3650. If the pressure on the currency returns, the quote will drop to 1.3400, a breakout of which will lead to the removal of many sell stops as well as a deeper decline to the level of 1.3300.

With regards to economic data, the latest report on retail prices, which determine inflationary pressures, were ignored by the market, even though the indicator declined. In a weekly report (for the period of November 2-6), UK retail prices are said to have fallen 1.8% after falling 1.2% in the previous month, with non-food products as the main driver of the decline.

Jakub Novak,
Analytical expert of InstaForex
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