The British pound arose after the news that the UK and the EU agreed to step up their efforts on negotiations regarding Brexit. However, the lack of visible progress is sure to turn the bullish mood downwards soon, as real changes in conditions and compromises on both sides are needed to completely reach an agreement.
At the same time, the macroeconomic reports published yesterday on the eurozone economy did not strongly support the euro, but the weakness on the US dollar returned after the statements made by the Federal Reserve and its representatives.
A meeting was held yesterday between British Prime Minister Boris Johnson and the leadership of the European Union, during which both parties agreed to increase the intensity of negotiations regarding Brexit. It was enough to encourage pound buyers who constantly use rumors to play ahead of the market in order to derive speculative benefits. The desire of both parties to conclude a trade deal by the end of this year is understandable, however, as has been repeatedly noted, there still lies the key problems of the deal regarding fishing and environmental standards, which remains a stumbling block in negotiations. Nevertheless, during a press conference, Boris Johnson said that he wants a trade deal by the end of summer. UK Cabinet Ministers also supported such a statement, notifying the EU that it would not use the law and allow the application of the extension of Brexit transition period until the end of June. Thus, on December 31, the United Kingdom, in the absence of a transaction, will withdraw from the current trade agreement, which will create a lot of problems for both parties. Business circles say that the deal should be concluded at the end of this fall so that companies can prepare for new conditions.
President of the European Council, Charles Michel, also gave a statement, saying that the ambitious and comprehensive trade agreement between the UK and EU after Brexit would be in the common interest, and the meeting would only give a new impetus to the negotiations.
As for the technical picture of the GBP / USD pair, the bulls managed to successfully consolidate the quotes above the resistance level of 1.2620 so their main task for today is to protect this range. But as usual, conversations on the Brexit deal will surely affect the movement of the pair, so we should not particularly count on maintaining a bullish mood without any specifics in this direction. A return to the level of 1.2620 is still possible, the occurrence of which will lead to the triggering of a number of speculative stop orders, which will increase the pressure on the pound and collapse it to the support levels 1.2535 and 1.2450. To maintain the bullish mood, quotes will have to break out of the resistance level 1.2715 and exit to the 1.2805 high.
Meanwhile, the US dollar began to decline again after the Fed announced its plans to expand the previously announced bond purchase program. It initially provided good support to the stock market but recently, statements about the allocation of aid have been putting pressure on the US dollar. The Fed has already set aside $ 250 billion for it but is preparing another $ 500 billion to add on its funds. The money will be used to support companies that have an investment rating, or in other words, bonds of all major American giants that had a stable credit rating as of March 22, i.e. before the coronavirus pandemic in the US.
In another note, the macroeconomic reports published yesterday, although could have been better, did not affect the markets as much.
According to data, the number of jobs in Germany's manufacturing sector fell by 1.8% in April compared with the same period last year. A report from Destatis revealed that by the end of April, 5.6 million people were employed at facilities in the manufacturing sector, which is approximately 105,000 less than in April 2019. In addition, work hours have also decreased due to the restrictive measures imposed because of the pandemic.
In Italy, the consumer price index fell by 0.2% in May, the same as the drop observed in May 2019. This suggests that deflation has occurred in the third largest eurozone economy, the main reason for which is the collapse of energy prices. However, it has by now recovered, so growth is soon to be observed in the index as well.
Another report that should not have been left unattended was the data on trade balance of the eurozone. According to official figures, the foreign trade surplus of the eurozone completed to € 2.9 billion euros in April, higher than the 15.5 billion recorded in April 2019. The sharp decline in exports was the main reason for such a rapid drop in the indicator, as the reports reveal that exports from the eurozone fell by 24.5% in April 2020. Imports also dropped by more than 13% in April 2020.
As for the US economy, the New York Fed published a report which indicated that due to the lifting of quarantine measures, production activity has recovered, so indicators have started to turn up. Thus, according to the calculations of the New York Fed, the production index rose to -0.2 points in June 2020, against its -48.5 points in May, while economists expected the index to be -35.0 points.
Meanwhile, the speech of Robert Kaplan, head of the Dallas Fed was very negative. Kaplan said that before making any conclusions, it is necessary to observe what will happen to the economy in the summer. Deflationary forces are to prevail in the next few years, and the inflationary impulse will remain rather restrained. Moreover, according to his calculations, a record-breaking GDP decline of 35% -40% per annum is expected in the 2nd quarter of this year, but in the summer, the economy will begin to recover, as will the labor market that will come to life after the quarantine restrictions are lifted.
As for the technical picture of the EUR/USD pair, it is still too early to expect a resumption of the bullish mood, as the bulls will have to keep the quotes above the support level of 1.1320 in order to ensure the continued growth of the euro to the highs of 1.1420 and 1.1515. Thus, in the scenario of a drop in quotes, the level of 1.1260 will act as support, but larger lows can be seen only in the area of 1.1190 and 1.1120.
