Powell can shake up the markets, but the euro and pound will not help

The NFIB Small Business Optimism Index fell to 103.3 p in June against 105.0 p a month earlier, and, despite the fact that the index is still at a historically high level, the June figures indicate the probability of a reversal. The uncertainty sub-index has grown to the highest level in 27 months, with business owners reducing costs and sales expectations. Capital expenditure plans are also being reduced, and the business is preparing to tighten credit conditions.

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The markets are dominated by a strong opinion that Trump will not allow the fall of stock indices before the presidential company, otherwise he will have no chance for a second term. That's right, but what resources does Trump have for this task? The fiscal reform has led to a sharp drop in budget revenues, and in September, the United States may be faced with the possibility of a technical default if the debt ceiling is not raised again.

A strong dollar provides as the basis for the entire global economy, but has a negative impact on the US trade balance. It is hardly possible to keep the stock indices at high levels with the growing threat of recession without weakening the dollar. If the Fed reduces the rate at its meeting on July 31, it will most likely cause a chain reaction from a number of other central banks, and the dollar is unlikely to lose its value.

Today, Fed Chairman Powell will speak in Congress, and the reaction of the markets to the performance may be significant if his rhetoric differs from the tone that was contained in the minutes from the last FOMC meeting while the markets are set to further strengthen the dollar.

EURUSD

The investor confidence indicator Sentix has updated its multi-year low once again, dropping to -5.8 p in June. The decline reflects the growing uncertainty of the business in the growth prospects of the European economy. The forecasts for June inflation are negative, which reinforces concerns about the outcome of the ECB meeting on July 25.

EURUSD is under pressure, support of 1.1180 can be achieved in the near future, which will strengthen the downward movement.

GBPUSD

The volume of retail sales in the UK, according to the BRK, decline in June by 1.6%, reaching the lowest levels in the entire history of observations since 1995. The picture, as follows from the report, is grim - wage growth did not lead to an increase in costs, as consumers began to prepare for the worst case scenario for Brexit.

The lack of clarity in this issue undermines consumer confidence, the pressure on retail is increasing, and the reason is not seasonality, but awareness of the impending recession.

The Bank of England, as a rule, seeks to repeat the actions of the Fed, with some delay. So it was after the Fed started the rate growth cycle in 2015, the Bank of England also raised the rate, but then nevertheless had to take a pause, since both the economic conditions and the Brexit situation did not favor monetary tightening.

In June, composite PMI went to the reduction zone, indices are increasingly worse than expectations, and, apparently, a sharp decline in GDP growth rates is not far off.

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So far, it follows that the contraction of the economy should be about 0.2% from PMI. The trend is that, along with the reduction in retail sales, there is no need to dream of rising inflation. The Bank of England will have to react, and this reaction will come before the deadline of Brexit.

In other words, if the Fed lowers the rate in July, as the markets wait, the pound will not get any advantage out of it - the markets will wait for the Bank of England to go the same way. Based on this, it is not necessary to expect the growth of the pound in the short term. Today, an impressive package of macroeconomic information will be published - a report on industrial production, trade balance and GDP growth rates for May inclusive, forecasts are neutral. On Thursday, data on inflation in June will be published, and the forecast is already negative - a slowdown is expected from 1.8% to 1.5%, which by itself leaves no chance for the pound to resume growth.

GBPUSD, as predicted, went below 1.25. The immediate support at 1.2426 can be broken through today, which will open the way to 1.21 in the medium term.

The material has been provided by InstaForex Company - www.instaforex.com