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19.08.202015:37 Forex Analysis & Reviews: GBPUSD and EURUSD: Pound's inflation and Investors' reaction on the Fed minutes

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Today's UK inflation data surprised many, if not all. However, why then the pound sterling did not rise, and instead returned from its local maximums in the area of 1.3260 to the larger support 1.3210, for which a fierce struggle is now being waged. It is not excluded that the pressure on the pound will continue in the second half of the day, and a short pause in the support area at 1.3210 will develop into a new sale of the pound to the minimums of 1.3170 and 1.3120. If the buyers of the trading instrument nevertheless turn out to be stronger and regain the bullish momentum, then it will be possible to talk about the resumption of the trend only after the breakout and consolidation above the area of 1.3260, which will open a direct road to the highs of 1.3320 and 1.3380.

Exchange Rates 19.08.2020 analysis

But let's figure out why the pound did not react with growth to such confident inflation data, which in normal times would lead to an inevitable wave of strengthening of the pair by 100-150 points within the day. The report is very simple - the current data cannot be considered representative, or reliable, due to distortions that were caused by the coronavirus pandemic in the spring of 2020. It will be possible to get a real picture only after the economy recovers from the consequences of the pandemic, but for now, this is very far away. So it turns out that the statistics awaiting us will continue to be unpredictable, and in August we may see a sharp decline in the indicator, although many economists will bet on continued growth.

But there is also an undoubted plus since the growth of inflation indicates and once again proves the fact that the country's economy has confidently taken the path of recovery after Covid-19 and, most likely, will continue to recover in the fall. A slowdown in growth can only be expected by winter when a second outbreak of the pandemic is expected, which will lead to more cautious spending among the population.

The reaction of many UK companies in the manufacturing and services sectors is unlikely to raise prices to cover costs incurred amid continuing social distancing measures. But, as has been repeatedly noted, today's report is unlikely to influence the decision of the Bank of England to resort to a new stage of monetary policy easing.

According to the data, the UK consumer price index (CPI) in July 2020 rose 0.4% compared to June, while economists surveyed had expected the figure to remain unchanged. Particularly strong growth was recorded in the annual period. The report indicated that annual inflation in the UK in July was 1.0%, and the core CPI, which does not take into account volatile categories, increased by 1.8% at all compared to the same period last year.

Exchange Rates 19.08.2020 analysis

It is already clear that the increase in the indicator was also partly due to the rise in oil prices, after their collapse amid the spread of the coronavirus pandemic. The August indicator will most likely be less dependent on this variable since prices have partially stabilized. You also need to understand that a sharp inflationary jump, as in the indicators of a significant rise in the volume of retail sales, was associated with the satisfaction of the deferred demand among the population, which fueled the prices of goods and services. Most likely, the influence of this factor will completely disappear in the next few months, which will significantly slow down the growth of prices, or even lead to some decrease in prices. Also, the weakening of demand will be affected by the completion of state employment support programs,

Exchange Rates 19.08.2020 analysis

EURUSD

As for the euro, traders ignored the data on inflation in the eurozone, as they fully coincided with the forecasts and were not of significant interest to the market. For statistics, according to the data, the consumer price index of the eurozone for July 2020 rose by 0.4% compared to June, while the forecasted growth was 0.3%. Compared to last year, inflation rose by only 0.4%, fully in line with economists' forecast. We see how all the prerequisites for slowing inflation growth, which I spoke about a little higher and which I tied to the UK, are already being implemented by the eurozone. As for the underlying index, it increased by 0.3% compared to June. This suggests that the volatility and pressure of commodity prices and energy resources have been minimized.

Exchange Rates 19.08.2020 analysis

As for the report on the surplus of the current account of the balance of payments of the euro area, there is noticeable good progress. According to the data, the balance in June rose to 21.0 billion euros, while in May the figure was 11.0 billion euros.

This afternoon it is necessary to pay attention to the report of the Federal Reserve System from the last meeting. The report may further reveal the attitude of investors to risk, which is no longer a clear driver of the US dollar. If the Central Bank continues to adhere to the current super-soft monetary policy, then the growth in the yield of Treasury bonds will certainly remain in the dreams of many investors. This will certainly lead to further growth in gold prices, counting on the acceleration of inflationary expectations. Further easing of monetary policy will further hit the yield of US treasuries and increase pressure on the US dollar.

As for the technical picture of the EURUSD pair, it remained unchanged. To maintain buying momentum, a break and consolidation above the 1.1963 resistance is required, which will lead to a new wave of growth towards the highs of 1.2000 and 1.2055. If we talk about the variant of a downward correction, which is more acceptable for buying the euro, then you can open long positions after the update of support at 1.1885, where the lower border of the ascending channel passes. The bulls will also try to defend the 1.1920 range, but this buying option will be optimal given the weak minutes of the Federal Reserve System, which are published later this afternoon. A break of 1.1885 support will quickly push EURUSD to the 1.1830 and 1.1780 lows.

Jakub Novak
Analytical expert of InstaForex
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