03.07.201909:27 Forex Analysis & Reviews: Panic returns and a sharp increase in demand for defensive assets will put pressure on EUR and GBP

The PMI ISM index in the manufacturing sector fell to 51.7p in June against 52.1p in May, which is less than predicted. However, a number of significant details of the report suggest that the industrial sector will continue to slow down in the near future. In particular, the sub-index of new orders decreased from 52.7p to 50p, while the decline in new orders is primarily due to a decrease in the demand of the US economy and not due to export orders, which directly indicates a broad decline in demand.

The ratio of new orders and inventories is noticeably worsening, therefore, the ISM index is expected to show an even deeper decline in July.

However, this is not the main concern. The key parameter of the report is the price index that fell to 47.9p against 53.2p in May, which is the lowest level in more than 3 years. This directly indicates the inevitability of a slowdown in inflation.

In general, the ISM report directly calls on the Fed to cut the rate already at the next meeting on July 31. If the labor market report for May, which will be published on July 5, turns out to be worse than expected. The probability of a rate cut is not by 0.25% but immediately increases by 0.5%, which will lead to a strong increase in panic and may trigger a global sale on stock markets.

The nearest guideline will be the publication of the ISM report on the service sector, only exceeding the forecasts. If it won't stop, there will be a delay in the growth of panic at the very least. In the meantime, the most likely resumption of demand for defensive assets, that is, for gold, yen, and bonds is expected.

EUR/USD pair

The manufacturing sector in Germany continues to experience significant difficulties and the PMI index in June remained deep below 50p. Showing only 45p, the index is at 7-year lows and there is no reason to expect changes in the coming months.

For the eurozone as a whole, the index is at 47.6p and finished-product output is declining. Given the high correlation with GDP growth rates, this makes it possible to expect a slowdown in the growth of the eurozone economy.

Hope for inflation in current conditions is not necessary. Producer prices continue to decline with a drop of 0.1% in May and an annual growth of only 1.6% for at least 12 months.

On Monday, we assumed that the upward trend in the euro will continue. Indeed, the euro fell to the support of 1.1270 / 80, followed by an attempt to resume growth but it was unsuccessful. Moreover, the position of the euro looks much worse today. Therefore, the scenario is changing to the opposite. The euro will try to update the recent minimum of 1.1275 and go down to the support of 1.1240/45, which will be the most likely scenario this morning.

GBP/USD pair

The pound could not find a single positive signal since the beginning of the week,as it slowly changes its direction from neutral to descending. Markit reports that the economy is slowing down in a number of industries. In particular, the manufacturing PMI index slowed down to 48 points in June and in the construction sector to the lowest of 43.1p since April 2009.

The Bank of England informed of a significant slowdown in May on consumer and mortgage lending,which directly indicates a drop in real incomes of the population. Mark Carney said on Tuesday that a large-scale trade war ranked first on the list of risks, and if it destroys the global economy, it will have an important impact on the UK's growth prospects. Thus, Carney made it clear that the Bank of England is ready for radical measures to stimulate the economy, which, apparently, can not be avoided.

The decline continues for the pound and a break to the support of 1.25 is significant for the near future. The long-term goal is 1.2426 and the move may accelerate if today's PMI Markit report on the service sector turns out to be worse than expected.