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16.08.2019 10:52 AM
Inevitable recession in doubt: GBP is trying to form a basis and EUR is worse than the market

Positive macroeconomic data released on Thursday eased tensions and allowed markets to recoup some of the losses. Retail sales rose in July by 0.7%, which was higher than the forecast of 0.3%. The preliminary data on labor productivity and labor costs in the 2nd quarter were also released that turned out better than forecasts, which indicates underestimated market expectations for employee income and as a consequence, for inflation.

After government bonds of a number of leading countries led by the United States showed inversion of yields, the prevailing mood in the markets was the increase in panic and rush demand for defensive assets, which led to the collapse of stock markets. However, a study by Mizuho Bank refutes the widespread belief that a recession is inevitable. In his opinion, negative consequences occur. First of all, it is a result of the tightening policy that preceded the recession. Since the Fed means a reversal in monetary policy, the chances of avoiding a recession are increasing, which could lead to upward markets.

EUR/USD pair

Germany's economy contracted in the second quarter and weak sentiment data suggest that negative growth continued in the third quarter, leading to a recession. A 0.1% decline in GDP in the second quarter followed an unexpected increase of 0.4% in the first quarter. Thus, the overall economy in the first half of the year is still growing noticeably.

However, the prospects are getting worse. Some mood indicators, such as Ifo, already suggest that the economy is in recession. A similar result was published by ZEW as the mood index in the business environment fell in August from -24.5p to -44.1p. In the eurozone as a whole, it decreased from -20.3p to -43.6p.

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Brexit will cause a significant blow to economic growth. The German government and the Bundesbank support the ECB's willingness to present a stimulus package at the September meeting. Yesterday, the head of the Central Bank of Finland, Olli Rehn, said in an interview with the Wall Street Journal that the upcoming package will have a more serious impact than a number of separate measures. It is expected to reduce the interest rate and significant bond purchases.

The euro today looks worse than the market. The momentum remains strong and it is not possible to form an upward correction. A break of support at 1.1091 and a pronounced movement to the minimum of August 1.1029 are likely.

GBP/USD pair

The pound is trying to form a basis above 1.20, using strong macroeconomic data. Consumer inflation unexpectedly rose in July from 2.0% to 2.1%, while the forecast is a decline to 1.9%,. The core inflation rose from 1.8% to 1.8%. Producer prices showed a noticeable increase and retail sales continued to grow steadily in July by + 3.3% better than forecasts. An increase of 2.6% was expected.

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Growth in inflation and retail sales indicates strong consumer demand, but inflation is largely supported by the weak pound, which has led to higher import prices. More indicative is the inversion of the spread of returns on 10- and 2-year UK government bonds, which was recorded on August 14. The inversion happened for the first time since the summer of 2008, and as an indicator of an approaching recession, it is a more informative tool for investors, since it has a long-term forecasting power.

The Bank of England traditionally follows the Fed in developing monetary policy. Strong data on inflation and retail sales remove concerns about the introduction of incentive measures at the next meeting. Meanwhile, the Bank of England will wait for the Brexit situation to resolve in order to focus on the consequences for the economy. Boris Johnson promised to leave the EU regardless of the scenario, which is regarded as a long-term threat and will not allow the pound to resume growth.

On Friday, trading in the range is more likely. No publication of significant macroeconomic releases is planned and support for 1.2015 looks more reliable than it seemed on Wednesday. An attempt is possible to update the recent maximum 1.2148 and a hike to the equilibrium zone of 1.2161/69.

Kuvat Raharjo,
Analytical expert of InstaForex
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