06.03.202011:18 Forex Analysis & Reviews: Whatever happens (EUR/USD and GBP/USD review on 03/06/2020)

The decision of the Federal Reserve System to urgently reduce the refinancing rate from 1.75% to 1.25% is forcing other central banks to follow suit which is primarily because of the influence that the Federal Reserve has on financial markets. And it was the understanding that other central banks would do exactly the same right now, initially and contributed to the strengthening of the dollar. However, the mood of investors somewhat changed yesterday, since the position of the European Central Bank is not entirely clear. Individual colleagues of Christine Lagarde only hint at the possibility of reducing the refinancing rate. But for the most part, the tone of argument is such that it seems that the European Central Bank will take a wait-and-see attitude and will not make hasty decisions. If we look at futures on the interest rate, then the refinancing rate of the European Central Bank should remain unchanged by the end of the year. Thus, the maximum that can now be expected from the European Central Bank is the next reduction in the deposit rate. And even then, there are still questions. In other words, one gets the feeling that the Federal Reserve has gone too far and given too much, and may be ignored. Indeed, if the European Central Bank does not reduce the refinancing rate, then the compression of the interest rate disparity makes the single European currency somewhat more interesting. And if we add to this the expectation that the Federal Reserve System will lower the refinancing rate again in the coming months to 1.00% this time, then the continued strengthening of the single European currency looks quite logical. Well, it also pulled a pound.

At the same time, macroeconomic statistics which were published yesterday in Europe look quite good. There is practically nothing published. However, the index of business activity in the construction sector in Germany increased from 54.9 to 55.8, although a decrease to 54.2 was predicted. Another thing is that the profitability of European government debt securities continues to go down, which still hints at a decrease in the refinancing rate of the European Central Bank. Thus, the yield on 10-year bonds in France declined from -0.11%, down to -0.32%. In Spain, the yield on 3-year bonds declined from -0.301% to -0.416%, 5-year bonds, from -0.103% to -0.260%, and for 10-year bonds, from 0.240% to 0.169%. Fortunately, 10-year papers still have a positive yield. Another thing is that the existing dynamics are clearly not encouraging, which means that investor interest in European debt securities will inevitably go down. Consequently, the observed growth of the single European currency is temporary.

Construction PMI (Germany):

Great Britain also reported well, as the pace of decline in car sales slowed from -7.3% to -2.9%. Although it was a decline, there are still visible positive dynamics.

Car Sales (UK):

At the same time, American statistics clearly did not inspire optimism; although, the data on applications for unemployment benefits came out relatively neutral. Their total number increased by 4 thousand, which turned out to be exactly two times less than expected. But the scale of the changes, both planned and actual, are quite nice. Nevertheless, the number of initial applications for unemployment benefits decreased by 3 thousand instead of growing by 1 thousand. The number of repeated applications for unemployment benefits, which was supposed to increase by 6 thousand, increased by 7 thousand. From this picture, it must be understood that US statistics was purely negative in nature, since the volume of factory orders decreased by 0.5%, which was only expected to decrease by 0.3%. Well, since orders are reduced, then there is nothing for the industry to increase from.

Factory Order Volume (United States):

Europe has already begun to publish macroeconomic statistics, and if you look at Germany, then everything's just wonderful, because unlike the United States, the volume of factory orders increased by 5.5%. So in Germany, there is the prospect of industrial growth. But if you look at Germany's neighbors in the European Union, it becomes somehow sad. In particular, France's trade deficit increased from -4.1 billion euros to -5.9 billion euros. The situation is similar with the balance of payments, the deficit of which amounted to -2.8 billion euros against -0.3 billion euros in the previous month. Spain, which remained the only one of the largest countries in the euro area until recently, showing industrial production growth of 1.1%, reported a decline of -2.1%, and this is in annual terms. Only Italy remains retail sales growth rates in which may slow down from 0.9% to 0.7%. Thus, if you do not count Germany, then everything is bad. And you can talk as much as you like about the fact that Germany is a locomotive and everything depends only on it, but no locomotive can go somewhere if all the cars, as insane, are pulled by a stop-crane. This is exactly what is happening.

Factory Orders (Germany):

Honestly, there are about the same sad expectations for the UK, as Halifax data on housing prices should show a slowdown in their growth rates from 4.1% to 2.8%. Well, the real estate market is almost the main criterion for determining the investment attractiveness of the British economy. At the same time, if housing prices go down, then investor's interest follows.

Housing prices from Halifax (United Kingdom):

The main event of the day is the publication of a report by the United States Department of Labor, from which its content does not bring anything positive to the dollar. For this reason, both the pound and the single European currency are not rushing to decline in spite of weak macroeconomic data. True enough, the unemployment rate itself should remain unchanged, but 165 thousand new jobs will be created outside agriculture compared to 225 thousand in the previous month which is a slowdown in the creation of new jobs. Therefore, the probability of rising unemployment and a general deterioration in the situation on the labor market increases. An excellent illustration of this should be the data on average hourly wages, the growth rate of which may slow down from 3.1% to 2.9%. This fact will lead to a decrease in consumer activity and retail sales, which also reduces the prospects for the recovery of industrial production.

Number of jobs created outside of agriculture (United States):

The single European currency continues to increase due to rumors and gossip. There are rumors that the Federal Reserve could repeat its recent focus and once again, lower the refinancing rate immediately by 0.5%. Nevertheless, this emotional and speculative surge can lead to the growth of the single European currency to the level of 1.1300, but just temporarily. After that, it will stabilize at 1.1250.

The pound simply ignores the rumors and gossip regarding the possible actions of the Federal Reserve System. However, the negativity of the contents of the report of the United States Department of Labor may well lead to an increase in the pound to the level of 1.3025. Nevertheless, it is noticeably overbought, and inevitably a subsequent decrease to 1.2950.