16.07.202009:11 Forex Analysis & Reviews: US is expanding sanctions against China, contributing to increased tensions; Overview of EUR and GBP

Asia-Pacific exchanges declined on Thursday morning amid rising geopolitical risks, with the Shanghai Composite Index losing 4.5% after the United States imposed visa restrictions on employees of Chinese technology companies, including Huawei. Europe also opened in the "red" zone, but the decline is significantly smaller, a sharp change in sentiment is unlikely, and the currency market remains relatively stable.

EUR/USD

The ZEW economic sentiment indicator for Germany declined from 63.4p to 59.3p in July, which also turned out to be slightly lower than the forecast of 60p.

It should be noted that for the eurozone as a whole, the ZEW index is at a close level of 59.6p, while 78.1p was forecasted. This means that even the removal of restrictive measures and easing of financial conditions are not sufficient grounds for entrepreneurs to resume business activity. Clearly, other factors that may have little to do with the pandemic are hindering the growth of sentiment.

An ECB meeting will be held today, which is expected to be a passing one, as the ECB head Lagarde warned market participants in advance that no new stimulus decisions will be made at this meeting, that is, the June expansion of PEPP to $ 600 billion is enough to support the eurozone economies.

As expected, EUR/USD pair made an attempt to update the local maximum of 1.1425, but the upper impulse is not strong enough to count on a confident passage of 1.1493. Nevertheless, it is more likely to move upward, with a decline to 1.1325. Buy deals will be considered with the target of 1.1420/40, closing the daily bar in this zone is necessary to attack the level of 1.1493.

GBP/USD

The UK economy is recovering after the removal of pandemic restrictions, but the pace of this recovery is still very uncertain and does not allow us to make a forecast about what measures the Bank of England is ready to take at the next meeting and whether these measures will contribute to a change in the pound's prospects.

Industrial production rose by 6% in May, but is declining by 20% year-on-year, and even despite a relatively low percentage in the overall structure of GDP, there is no reason to hope for a fast economic growth. GDP growth in May amounted to 1.8%, which is less than the forecasted 5%, and NIESR gives a forecast with the inclusion of data for June at -21.2%, which is worse than -18% a month ago.

In addition, NIESR gives a negative outlook on the labor market. According to his calculations, the growth of nominal wages, including bonuses, will become negative and will be -1.1% in the second quarter.

The latter forecast is important for assessing the pace of recovery in consumer demand – a key driver of the economy. Apparently, the situation looks favorable – inflation in June increased by 0.1% mom and 0.6% yoy, which is better than the forecast, however, as NIESR analysts rightly note, the inflation rate is measured using a new methodology since April. In other words, the methodology for calculating inflation was quickly changed to better reflect the effects of the coronavirus pandemic, but obviously, the results cannot be compared with those of a couple of months ago. As a result, the real level of inflation in the country is currently unknown, and therefore, the future reaction of the Bank of England is unknown.

The pound continues to trade in the range, not responding to generally positive data. The reason seems to be political - the UK launched an information company on Monday urging entrepreneurs to prepare for the end of the Brexit transition period, but most entrepreneurs, judging by the polls, don't know what to prepare for, because they don't understand the essence of the upcoming changes.

The driver for the growth of GBP/USD will most likely not take shape in the near future. The resistance is at 1.2660/80, which will likely form a downward movement. The goals are at 1.2320/40.