25.01.202111:10 Forex Analysis & Reviews: EUR/USD and GBP/USD: EU and UK economies are heading towards a double economic recession, which limits the upward potential of euro and pound.

Weak economic indicators pulled demand down for the European currency.

The problems began immediately after many countries resorted to a partial lockdown last November. Now, these measures are still in place, and the risk of a longer quarantine period is a matter of concern for governments and central banks.

According to the International Monetary Fund (IMF), the world economy will face more difficult challenges this year, since COVID-19 continues to spread at a fairly rapid pace, and the pace of vaccinations is much slower than expected. Economic growth is believed to take much longer than previously projected, in particular, by only 4%, according to the World Bank. Similar forecasts are expected from the IMF.

But while the economic outlook has deteriorated, financial markets have continued to rally amid optimism over government incentives and more rapid vaccination efforts. The European currency, for example, received much support from these news. However, last Friday, it still failed to break above 1.2190. In any case, its breakout could trigger a jump towards 1.2230 and 1.2280. But if the bears regain control over 1.2140, EUR / USD could drop to 1.2090, and then to 1.2055.

With regards to incentives, last Sunday, discussions about the proposed $ 1.9 trillion bailout fund began. But to date, Republicans are increasingly criticizing the further widening of the budget deficit the new aid program will cause, while Democrats are pushing for such measures due to the persistent increase of COVID-19 infections in the United States.

The approval of this program relies on Senators Mitt Romney and Lisa Murkowski, as they were the most influential during negotiations on the $ 900 billion bill passed last month. But the recent statements of these two senators indicate that it is too early for the US to consider a new stimulus program.

As for recent economic reports, composite PMI in Germany fell to a seven-month low this January, mainly because of reduced activity amid tough quarantine restrictions. Composite PMI fell to 50.8, from 52.0 last month. In any case, the value is higher than expected

Activity in the service sector also contracted for the fourth month in a row, while industrial production, although remained in positive territory, fell to a five-month low. In particular, Service PMI dropped to 46.8 points, while Manufacturing PMI fell to 57.0.

With this, it is clear that economic recovery in Germany has slowed, and the extension of the current lockdowns, at least until mid-February, would result in the further deterioration of the situation.

Meanwhile, in the whole Euro area, where activity has also declined at a faster pace, composite PMI has fallen to 47.5 points, from 49.1 points last month. Service PMI dropped to 45.0 points, while Manufacturing PMI collapsed to 46.4 points.

As for the housing sector in the US, they continue to break records, according to a report from the National Association of Realtors. Deals have jumped by 0.7% to 6.76 million, while analysts had expected a decline of 2% to 6.55 million. Low interest rates continue to keep the US real estate market active.

GBP

Pound tumbled in the market last Friday amid weak data on UK retail sales. The report from Office for National Statistics said the indicator rose only 0.3% month-on-month, following a sharp 4.1% decline last November. The growth rate was below the forecasts of economists, who had expected the indicator to rise by 1.2%. The strongest sales were recorded in clothing stores, where the indicator fell immediately by 21.5%. Most stores have been closed due to ongoing economic lockdowns.

Composite PMI also declined to 40.6 points this January, which suggests that the UK economy could undergo a fairly serious rate of contraction in the first quarter of 2021. Avoiding a double recession will definitely not be possible. In fact, according to IHS Markit, GDP will collapse more than the 2.6% drop last November.

To add to that, Service PMI has also fallen to 38.8 points, while Manufacturing PMI has dropped to 52.9 points. The new strain of coronavirus further complicates the situation.

As for GBP / USD, recovery prospects are quite good. However, movement will turn up only if the quote breaks above 1.3735. Such a scenario will push the pound towards 1.3800 and 1.3850, but if the quote goes below 1.3860, or at 1.3636 in particular, GBP / USD will collapse to 1.3580 and 1.3530.