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The emerging third pandemic wave has led to talks of a much softer monetary policy, as well an expansion of the bond buyback programs in both the euro zone and the United States.
This is because if quarantine is to be re-introduced, say for example in Europe, then the Central Bank has to revise its policy in order to accomodate the negative consequences that will happen to the economy. However, no matter how much the policy softens, it is unlikely to accelerate inflationary pressure, as it can only be done through changes in fiscal measures.
With regards to bond buyback programs, it will only increase if volatility accelerates due to lack of liquidity or a sharp increase in bond yield. So, for Europe, if the current surge in coronavirus infections leads to re-imposition of quarantine restrictions, the ECB will be forced to act immediately in order to forestall an economic downturn. However, this scenario is unlikely to happen at the moment, even if the forecast for euro area's GDP is only a 1.5 growth in the 4th quarter. This is because aside from the current recovery of various sectors of the EU economy, a phenomenal 9.0% jump in GDP is expected in the third quarter. In addition, the recent report of Ifo institute indicated a rise in employment indicator, which is good for the overall EU economy.
Another improving data is manufacturing activity in the area of Dallas Fed, which in September this year rose to 22.3 points, indicating a very large increase in production. Business activity also jumped to 13.6 points from 8.0 points a month earlier.
About the EUR / USD pair, the bulls are one step away from achieving an upward correction, as only a breakout above the resistance level of 1.1690 is needed to bring the quote to the levels 1.1735 and 1.1780. But, the pair could still decrease if the quote returns to the level of 1.1640 or below, as such will lead to another sell-off in the EUR / USD pair. If this happens, euro will decline to a price of 1.1580 or 1.1540.
GBP / USD
Demand for the pound rose in the market recently, amid rumors that the EU and the UK may sign a trade agreement this week. Although no official statements have been made on this score, there is a high chance that the parties may make a breakthrough in this direction, especially since the Bank of England could introduce negative interest rates any minute, and the UK economy is about to close again due to another surge in coronavirus infections.
The sharp rise in coronavirus incidence made the UK government express its want to ban residents of North East England from visiting each other, as such measure is needed to prevent the further spread of coronavirus. Currently, the incidence rate of COVID-19 has reached 6,000 in the UK, which is the highest statistics recorded in the country.
On the subject of trade agreement, the UK is planning to have a new alliance with the United States, and this was announced yesterday by the Minister for International Trade, Liz Truss.
With regards to the GBP / USD pair, pressure could return on the pound if authorities failed again to sign an agreement on Brexit. A fall below the support level of 1.2830 will return the quote to the level of 1.2760, and a breakout below which will bring the pair to a price of 1.2690. However, if the bulls still get ahold of the market even in these conditions, the quote could reach and move above the resistance level of 1.2885, which will raise the pound even higher to a price level of 1.3000.
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