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The EUR/USD pair is still trading near annual lows, while GBP/USD is located close to the lower border of a relatively important wide sideways range. If the price breaks through the range, the pressure on GBP/USD will probably increase in the short term. However, a breakout and consolidation below it may take place only under particular circumstances.
The EUR/USD pair is still trading near annual lows, while GBP/USD is located close to the lower border of a relatively important wide sideways range. If the price breaks through the range, the pressure on GBP/USD will probably increase in the short term. However, a breakout and consolidation below it may take place only under particular circumstances.
Before we discuss today's monetary policy decision of the Bank of England, I'd like to talk about growing pressure on the Senate from the Joe Biden administration for adoption of the proposed $1.9 trillion rescue plan. Yesterday, President Biden told the House that he would stick to his pledge to pay additional $1,400 checks to every eligible American. Any concessions to change the amount of payments would mean that his presidency had begun with the breaking of his election promises.
Addressing the House of Representatives, Biden made it clear that he did not want to reduce the amount of checks mentioned in his stimulus program. "We can't walk away from additional $1,400 in direct checks we proposed because people need, and frankly, they've been promised it. I'm not going to start my administration by breaking a promise to the American people," Mr. President said. "We cannot dawdle, we cannot delay, we cannot dilute, because the troubles that this nation has and the opportunities that we can bring them are so large," Senate Majority Leader Chuck Schumer stated yesterday. Schumer strives hard to push the $1.9 trillion stimulus package through the Senate.
Notably, Republicans offer to reduce the amount of checks as well as to drop the number of Americans who need support. They are concerned about ballooning national debt since larger payments to households may not return to the economy, as Democrats plan, but will become savings for a rainy day. Senate Republicans have proposed issuing $1,000 payments for individuals earning as much as $40,000 or couples making twice that, and completely phasing out the payments by $50,000 for singles or $100,000 for married couples.
GBP
A rather interesting meeting of the Bank of England will take place today. The regulator should make a decision on monetary policy. No one doubts that it will remain unchanged. What matters the most is whether the Governor of the Bank of England will touch upon the topic of negative interest rates that concern investors.
Today, the central bank will publish its decision on interest rates, as well as a report, which may give a hint on how to help restrain market borrowing costs. Economists expect the QE program to remain unchanged. Currently, an extra £150 billion quantitative easing programme announced last November is sufficient enough to support the economy.
Given this fact, UK Treasury Secretary Rishi Sunaka can use the situation to announce an increase in budget spending on March 3, which will be aimed at supporting the UK economy in 2021. Last year, the Treasury pushed national debt to record highs while helping support workers and businesses. Most likely, similar financial aid programs will be extended until this summer. To do so, low borrowing costs are needed. This is another reason for the Bank of England to seriously consider the possibility of negative interest rates.
Given the changes in the economy, during today's meeting, the regulator will mainly focus on whether it is worth lowering borrowing costs below zero by using negative interest rates. Let me remind you that the Bank of England has never before turned to such a policy. But before resorting to the new program, the central bank will certainly publish a report, which will detail the pros and cons of this policy. It will include over 160 responses from banks on this issue. Many banks fear that negative interest rates will irreparably damage their profits.
Notably, markets do not seriously consider the possibility of negative interest rates. Therefore, if the bank makes such an announcement, it may lead to a major drop in the British pound in the short term.
As for the economic outlook, the UK economy has continued to slow down due to tough Covid-19 restrictions since the last meeting of the Bank of England in 2020. In fact, the lockdown in the UK will continue until this spring. Under the circumstances, economists will have no other choice but to revise their forecasts for the first quarter.
As for GBP/USD, everything will depend on a breakout at the support level of 1.3610. If it occurs at the same time with Andrew Bailey's interest rate statement, the pressure on the currency pair will increase sharply. As a result, the price may fall to the low of 1.3575 and 1.3530. Further targets are seen in the area of 1.3480 and 1.3430. The pound will be able to recoup losses only if bulls regain control of the resistance level of 1.3660. Then, the price may rise to the highs of 1.3710 and 1.3760.
As for EUR/USD, an important target for bulls is seen at the resistance level of 1.2045. The demand for the euro will increase if the price breaks through the resistance level. In such a case, the pair may advance to the highs of 1.2090 and 1.2130. The key task for bulls will be to regain control of the 1.2185 level by the end of the week. The pressure on the euro will remain only after a breakout at the support level of 1.2005. In such a case, the pair may drop to the low of 1.1965 and even plunge to the support level of 1.1920.
Meanwhile, yesterday's ADP jobs report turned out to be better than economists had expected. This means that the US labor market is still recovering. According to the ADP employment report, the number of jobs created in the private sector advanced by 174,000 in January 2021. Experts had expected the reading to rise by 50,000. In December, private business in the US lost 78,000 jobs.
Nevertheless, it is too early to say that the situation has improved. If earlier only small and medium-sized businesses had problems with job growth, then now there are signs of a long-term impact of the pandemic on large companies. Overall, the indicator has increased only thanks to a 156,000 surge in the number of jobs in the services sector.
Tomorrow, the US Labor Department will present its reports on Non Farm Payrolls and unemployment.
The US services PMI rose more than expected in January 2021. Despite a spike in coronavirus infections, the situation in the services sector was stable in January. Meanwhile, the composite PMI grew to 58.7 from 57.7, revised in December. Economists had expected the reading to be 57.0. The ISM non-manufacturing business activity dropped to 59.9 from 60.5 in December.
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