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How to trade ahead of the ECB and the Bank of England meetings?


The dollar index still tends to decline, trading in a narrow range. The US dollar accelerated the pace of its decline against a basket of competitors on Tuesday in the US session. The indicator went below the level of 96.30. Thus, it broke down the border of the medium-term upward trend.

The US dollar may still benefit from the spread of the coronavirus in the short term. It is the fears of a pandemic that keep it from falling even further now. The long-term forecast remains bearish if we consider that COVID-19 will still be defeated. However, opportunities for growth in the short and medium term cannot be excluded. A jump can happen on a major correction of the US stock market.

In general, the greenback has a lot of negative factors. These include a drop in demand for dollar liquidity and weak interest in protective assets. Additional difficulties for it include increasing the rating of the US presidential candidate Joe Biden. The policy of the Democrats is just a bearish factor for the dollar.



At the same time, the dollar was growing against the British pound on Tuesday, continuing the trend that had begun the day before. However, it is more likely that the dollar is not growing, but the pound is falling, as the bearish dynamics of the GBP/USD pair is connected with the news in Britain.

Bank of England Governor Andrew Bailey made it clear that the central bank will have to resort to more aggressive quantitative easing to overcome the crisis in the country. Earlier, Bailey said that the central bank is considering a scenario of negative rates. Now the rate is 0.1%, but "we are extremely close to zero interest rates," Bailey said.

The pound received an additional negative from the publication of UK GDP data for May. The economy grew by only 1.8%, while markets were counting on 5% growth. The indicators in the construction and manufacturing sectors turned out to be very weak.

The GBP/USD pair was trading in the positive during the US session, which is mainly due to increased pressure on the greenback. Trading volatility increased after the publication of consumer price indices in the United States.

Despite the rise in sterling earlier this month, it remains under pressure from fundamental factors. These are the risks of a hard Brexit and an expected slowdown in the country's economy, undermined by the coronavirus pandemic. The pound once again went to the zone below the key resistance level of 1.2580.

If the pound continues to trade around this level without a hint of a higher exit, then short positions on the GBP/USD pair will be preferred. A breakout of the 1.2490 support will confirm the scenario for a subsequent decline in sterling.



As for the alternative scenario, the pound's growth, it is worth looking at the breakout of 1.2580 and the local resistance level of 1.2670. If this happens, the GBP/USD pair will resume the upward trend.

The euro's position looks pretty good now. The EUR/USD pair continues to develop growth waves to around 1,1400. Given the upward trend, it can be assumed that after a small correction, the quote will continue to grow to the resistance level of 1.1420. In this case, do not exclude the possibility of returning to the price of 1.1300.



The next meeting of the European Central Bank will be held on Thursday. The regulator can now afford to relax a little. Two important tasks have been completed – financial markets have been stabilized and economic activity has been rebooted together with the EU government. Signs of recovery can be seen in macroeconomic publications. It is unlikely that the ECB will be able to surprise the euro at this meeting after three rounds of powerful stimulus.

According to the latest data, the ECB has no reason to expect sharp changes in inflation, despite the fact that inflationary pressures have appeared in some parts of the economy. In general, conditions for slowing inflation prevail. So far, officials of the European regulator do not have a good reason to correct the policy. The status quo will probably be maintained.

The euro will lose an important driver of growth if the gloomy forecasts of Wall Street experts come to life. Now the rally of US stock indexes does not allow the dollar to take a full breath.

The material has been provided by InstaForex Company -