07.12.202214:54 Forex Analysis & Reviews: China abandons Covid Zero policy

The euro and other risky assets, including the British pound, are slowly recovering amid news that China finally abandoned its Covid Zero policy, loosening a number of restrictions it had imposed long after the rest of the world had lifted them. By abandoning key principles to limit the spread of the coronavirus, including the requirement to quarantine infected people, China's Covid policy has begun to ease faster than expected. Experts note that the abandonment of a number of significant restrictive measures reflected growing pressure on Xi Jinping.

The National Health Commission of China has outlined 10 new principles it intends to adhere to after the country's reopening was initiated. An additional 20 recommendations for officials were also developed.

However, markets reacted rather calmly to this news, as it was expected as early as last week that a consensus on this issue would still be reached. However, the initial rally in risky assets collapsed, as some investors were concerned about the surge in the number of new cases. After that, strong fundamental statistics on the US came out, which wrecked hopes of an early loosening of monetary policy by the Federal Reserve.

In China, the data showed that recent steps taken by the authorities include speeding up vaccinations for the elderly and prohibiting local authorities from imposing restrictions on large facilities. Also, the green health code in smartphone apps, which was asked for domestic travel or to enter large public places, is no longer required.

As experts point out, the nationwide rollout of the home isolation rule, first introduced in Beijing after quarantine facilities became short on space, could change the public perception of the virus from a serious health threat to more widespread disease. The government defended its Covid Zero approach throughout the pandemic with a policy of widespread testing and blocking to eliminate infections. As a result, this left China isolated and caused poverty and economic hardship.

Judging by the latest data coming out of China, such measures have already damaged the economy quite substantially, slowing down its growth and negatively affecting households, which, along with psychological stress, have been struggling with financial problems. Trying to recover the economy, high-ranking officials have set the economic growth goal at around 5% in 2023.

As for the EUR/USD pair, the demand for the US dollar has weakened a bit. To return to growth, the euro needs to break above 1.0480, which will spur the trading instrument to the area of 1.0530. In this case, the price may climb to 1.0560. If the pair breaks through the support of 1.0440, it may put more pressure on it and push the euro to 1.0390, opening the way to the low of 1.0330.

As for the GBP/USD pair, after yesterday's downward sharp movement, bulls are likely to take control of the market. They need to break above 1.2150. If this level is broken through, the price may return to the area of 1.2200. After that, it will be possible to speak about a sharper rally to the area of 1.2265. The pressure on the trading instrument may return after bears take control over 1.2070. This will strike a blow to the bulls' positions and push the British pound back to 1.2000 and 1.1955.