11.09.202014:27 Forex Analysis & Reviews: EURUSD and GBPUSD: Euro continues to strengthen. UK GDP fizzles out

The euro reacted with a slight increase against the US dollar, but the momentum for further recovery was marred by data on German consumer prices, which have been declining for the second month in a row.

In a report by the statistics agency Destatis, Germany's final consumer price index (CPI) fell 0.1% in August compared to the previous month. But the CPI index, harmonized by EU standards, dropped by 0.2%. As a result, the data fully coincided with the forecasts of economists, which did not greatly affect the market.

In her speech on Thursday, ECB President Christine Lagarde touched upon the topic of inflation. According to her, inflation will remain in negative territory only in the coming months, and the high euro rate may further put pressure on the indicator. As for the forecasts of economists from the European Central Bank on this issue, it is expected that inflation in 2020 will be 0.3%, grow to 1% in 2021, and to 1.3% in 2022. These forecasts are in line with the final data for Germany, and I think that the same state of affairs will be observed in many other countries of the eurozone. Compared to the same period last year, the German CPI remained unchanged in August.

It has been repeatedly noted that weak inflation in Germany is due to the recent temporary VAT cuts. This decision was made by the German authorities on July 1 as part of the economic stimulus program. The sharp decline in energy prices in August this year, which dropped immediately by 6.3% after falling by 6.7% in July, also negatively affected the overall indicator.

The slowdown in the growth rate of the global economy in the 3rd quarter can no longer be avoided, since, judging by the new number of COVID-19 cases, the second wave of the pandemic may no longer be avoidable. Although many anticipates it to hit winter this year, many European cities have again resorted to large-scale isolation measures and compliance with quarantine standards. All of this is having a very strong negative impact on the barely recovered consumer services sector and other industries.

Given the fact that the United States has been greatly affected by the coronavirus pandemic, the gap between the growth rates of the eurozone and the US could narrow significantly over the next few years, which will support the euro, making demand for risky assets more attractive. The EU Recovery Fund, launched in the summer, will give the eurozone economy even more confidence, which will boost investor optimism by making investments in the euro even more attractive. It is also worth noting the fact that low and negative interest rates in the eurozone are gradually losing their force, judging by the reaction of the euro to the last meeting of the European Central Bank and to Christine Lagarde's statements about maintaining the super-soft monetary policy for a long time. The European regulator will most likely need additional policy easing in order to weaken the Euro.

As for the technical picture of the EURUSD pair, the tasks and goals are the same. For the bulls to implement their plan to update the 1.2000 level, they need to first deal with the resistance at 1.1850. And only after that will it be possible to expect a second wave of growth in risky assets to the area of the maximum at 1.1905 and the renewal of the 20th figure. If the pressure on the pair persists, and the growth continues after the breakdown of the support level of 1.1800, the bears will try to return to the low of the week which is at 1.1755. From this level, the downward trend will continue to build to the levels 1.1710 and 1.1650.

GBPUSD:

Meanwhile, the pressure on the GBP/USD pair continues to persist. The bears again took control of the market after the unsuccessful breakdown of the resistance at 1.2850, against the background of a quite normal data on the UK GDP. Therefore, in the near future, we will see tests of such levels as 1.2725 and 1.2670. But it may also happen that large sellers prefer to take profits at the end of the week, which will lead to a slight recovery in the trading instrument. However, it will be possible to speak of an upward correction only after the buyers have firmly consolidated above the resistance of 1.2890, which will open a direct way for the trading instrument to the highs of 1.2940 and 1.3020.

As for the statistics, as noted above, the UK GDP in July 2020 increased compared to June, but it is still too far from returning to the previous pre-crisis level. A report from the National Bureau of Statistics indicated that the UK economy grew 6.6% in July 2020, compared with 8.7% in June. The growth was mainly due to the recovery of the service sector, where the highest activity was recorded in the post-crisis period.

Despite this, the UK economy continues to be in danger. It's not just about the Brexit trade deal, which is about to become a thing of the past without ever taking place. The point is that after the economy contracted by more than 26% from February to April 2020, not much returned in the summer. The UK GDP remains 12% less than before the coronavirus pandemic. Given the more moderate pace of recovery in July and the expected slowdown in the fall, after the decline in deferred demand and the completion of employment support programs, there is only hope for additional assistance from the Bank of England and the authorities, which may revise the fiscal policy.