Euro declined yesterday, which somewhat confirms that there are no large buyers in the market. Aside from that, there weren't any preconditions for a rise. There is only uncertainty in the EU and rather low expectations for economic recovery. The US also constantly records an improvement in its situation, unlike the EU, who, up at this moment, is under a recession. Therefore, there is a high chance that the euro will continue to drop against the US dollar.
But this decline is only temporary because soon, the financial boom in the US will end. And as soon as this happens, debts and budget deficits, which were inflated by stimulus measures, will be clearly seen. The dollar will also suffer from increased inflationary expectations, especially since the Fed will not rush to change interest rates. Most probably, it will remain at a low level for a few more years.
In the meantime though, the US will continue to discuss additional stimulus. Yesterday, news broke that the House of Representatives is planning to pass the $ 1.9 trillion plan proposed by President Joe Biden. Apparently, after the Democrats failed to achieve a second declaration of impeachment for former US President Donald Trump, they decided to concentrate on more important goals and objectives.
Democrats have long insisted that a quick vote on another stimulus is needed, since the current support measures expire on March 14 this year.
Last week, a House committee approved a budget bill that would allow them to pass new bills by a simple majority in both houses. House Speaker Nancy Pelosi said she will send the new stimulus bill to the Senate as soon as it is passed by the House. Unsurprisingly, Republicans criticized this approach, arguing that Democrats should follow the normal legislative process.
In another note, latest reports indicate that manufacturing activity in New York grew at a fairly rapid pace in February this year. Business conditions have risen to 12.1 points, beating economists' expectations. In a survey, 32% of respondents said conditions had improved, while 20% reported that conditions had worsened compared to January.
Today, the Federal Reserve will publish its January minutes, but there is a low chance that it would affect market dynamics and sentiment. Many already expected that the Fed will not change its monetary policy and would focus on inflation.
To add to that, Mary Daly, who is the head of San Francisco Fed, said that everything is stable and is in normal conditions. Hence, almost all Fed officials came to the conclusion that the US economy could grow much stronger than expected. Similar statements will most likely appear in today's publication, so volatility may spike in the markets.
But at the moment, in EUR/USD, unsuccessful attempts to consolidate above the monthly highs resulted in a sell-off and return towards 1.2085. A break below this level will certainly lead to a further drop towards 1.2050 and 1.2000. But if the quote returns to 1.2125, the euro will climb again to 1.2165.
GBP/USD
Pound may continue to drop if there are weak inflation reports for the UK. But if the data turns out better than expected, a bull market may resume, especially since according to the latest statements of the government and British Prime Minister Boris Johnson, quarantine measures in Britain may be eased soon.
Returning to 1.3910 will most likely lead to a larger rally towards 1.3955 and the 40th figure. But if the quote moves below 1.3865, GBP/USD will collapse to 1.3820 and 1.3770.
At the moment, investors are pressured with the UK budget for next year and new measures to support the economy. An interview with former Treasury Ministers said incumbent Treasury Secretary, Rishi Sunak, will still have to raise taxes, even if it violates the election promises of Boris Johnson and his Conservative Party. The budget will be approved next month, but before that, the government must think carefully on where to get new money to support the economy.
With the UK in a third stage of national isolation, Sunak said he plans to agree on a budget by March 3, stating that his priority remains to be job protection and the recovery of the labor market. The success or failure of the budget will determine whether the UK can emerge from its deepest recession.
