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Fed's leadership did its best to further weaken the dollar. However, the issue is that the dollar is already extremely oversold and the market has long overdue quite a serious correction. Therefore, all the efforts of Jerome Powell and others would be for nothing. There was a hint yesterday that this could happen in the very near future, but no one expected this turn of events so suddenly. It took several hours for the market participants who fell into a daze to realize what had happened.
It all started quite decently, as the European currency continued to grow steadily. On the other hand, the pound received quite good support from the credit market, which showed much more impressive results than expected. In particular, the volume of consumer lending increased immediately by 1.2 billion pounds instead of 0.6 billion pounds. Moreover, the volume of mortgage lending increased by 2.7 billion pounds instead of the forecasted 2.5 billion pounds. The mortgages grew, since 66.3 thousand mortgage loans were approved, instead of the expected 51.0 thousand. In general, Britain shows signs of a confident economic recovery. After all, the growth of lending indicates an increase in consumer activity, which is the main guarantee of economic growth.
Number of approved mortgages (UK):
Everything went well, however, the issue came from where no one expected. So, yesterday's main event was the publication of preliminary data on inflation in the euro area. And according to the most pessimistic forecasts, this inflation should have slowed down from 0.4% to 0.0%. The preceding data on inflation in a number of the largest countries of the euro area and in all indicated, only slowed down to 0.2%. However, the reality turned out to be completely different. Everyone saw that consumer prices fell 0.2% year over year.
To simply put it, deflation has begun in Europe and no one was ready for this. It means that all the talk regarding the speculation by ECB officials about the long-term risks of negative interest rate policies is just idle talk. There can be no question of any increase in interest rates yet. In addition to this, the unemployment rate also rose from 7.7% to 7.9%, which was really surprising.
Inflation (Europe):
It is necessary to understand how long deflation will last. It is quite possible that this is only temporary, which will become nothing more than a nightmare tomorrow. In view of this, producer prices can give the answer to this question, which is a leading indicator for inflation. Fortunately, the forecasts are quite encouraging, and the rate of decline in producer prices could slow from -3.7% to -3.5%. Of course, it cannot guarantee that deflation will be replaced by inflation next month. Nevertheless, this data can provide such hope that it will greatly reassure many investors. Thus, if the forecasts come true, the euro's weakness together with the pound will stop.
Producer prices (Europe):
In the United States, the Department of Labor report is gradually being prepared for publication on Friday, and one of the most important stages of this preparation is the publication of ADP employment data. Employment itself can grow by 1 000 thousand, which is just a great result. This is due to the recovery of the labor market. Moreover, this will indicate that the content of the report of the Ministry of Labor may greatly please market participants.
ADP Employment Change (United States):
Data on producer prices may stop the euro's weakness, however, the market has long been overheated. At the same time, the United States is expecting good data on the labor market, so in general, the euro may decline to the level of 1.1825.
The pound will follow the euro, so we should expect it to decline to the level of 1.3300.
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