GBP/USD. Boris Johnson: "There will be no second lockdown". British business is sounding the alarm and asking the government

4-hour timeframe


The British pound was generally trading slightly lower last trading week, in contrast to the European currency, which continued to grow. Thus, we point to the uncorrelation of the two main pairs. This means that the factors that currently affect the movement of pairs are different, that is, they can not come from America. Since there was no particularly important news last week for the British pound and the European currency, we still tend to the option that market participants have finally remembered the deplorable state of the UK economy and that the Bank of England is seriously considering the introduction of negative rates, and it is completely unclear how the negotiations with Brussels will end. More precisely, everything is clear here. London and Brussels are unlikely to agree and from January 1 next year, the EU and the Kingdom will trade under WTO rules. Do I need to remind you that this is all bad news for the pound? As in the case of the euro currency, the British currency has been trading with a slight increase in recent months, which could be caused by the political, economic, social and epidemiological crisis in the United States. However, traders are primarily concerned about the economy of each country, and here everything is not in favor of the UK, whose "coronavirus crisis" is multiplied by the effect of Brexit. Thus, for the pound/dollar pair, we are still inclined to resume the downward movement.

Meanwhile, on Friday, July 17, the Governor of the Bank of England, Andrew Bailey, said that the country's economy has begun to recover, but many sectors of the economy remain weak, and the long-term prospects are absolutely vague. In principle, Bailey repeated the rhetoric previously voiced by Jerome Powell and Christine Lagarde. It is clear to everyone that the long-term prospects remain uncertain. "We see a recovery in economic activity and are beginning to see some economic recovery. There were signs of strong growth in activity in the housing market and car sales, but not in the entertainment and hotel industries, which employ a large number of people, many of whom receive low wages. There remains uncertainty about how cautious people will be about returning to pre-crisis life, and there is a risk of a second wave of COVID-19 or localized outbreaks," the Bank of England Governor said.

Meanwhile, UK business is sounding the alarm. It seems that it is Brexit No Deal that scares them the most, and not the "coronavirus crisis". Although, perhaps, here one thing is layered on the second. In any case, it is not the first time that business in Britain has asked the government to do everything possible to ensure that a free trade deal with the European Union is concluded. However, according to Michel Barnier and many other politicians and experts in the field of political science, London is not in a hurry and is not eager to conclude a deal with the European Union. This may be, in particular, due to the fact that Brussels wants one comprehensive agreement that will include not only the organization of trade relations. London wants to conclude agreements separately and is primarily interested in trade. Thus, Boris Johnson, who has not yet reached Brussels to meet in person with Ursula von der Leyen and other EU leaders and negotiate an agreement with them, may wind down negotiations with Brussels altogether within a few months. We can only observe what is happening and react to it.

At the same time, it became known that Boris Johnson is not going to introduce a second "lockdown" in the country, even if there is a new outbreak of "coronavirus". The British Prime Minister said that the new "hard" quarantine will look like a "nuclear deterrent", and the country may simply not be able to withstand it. In an interview with the BBC, Johnson said that the right to quickly block certain districts, regions, districts, and even individual locations (like a store) has been transferred to local authorities. It is up to local governments to monitor all outbreaks of the virus and respond quickly to them, taking action at their discretion. Professor John Edmunds, for example, believes that a return to normal life is still very, very far away. The Professor said that hugs, handshakes, public transport and in general life without restrictions will not return to the lives of Britons for a long time. "We will not be able to make it until then, until we become immune to the virus. The vaccine is still far from being discovered, and its effectiveness and safety must be proven. If we return to normal life, the virus will return very quickly," Edmunds said.

In the dry balance, we have the following. The outlook for the British pound is starting to look very bleak again. The UK currency recovered more than 1,100 points after falling in mid-March, but then there was force majeure. It cannot be said that the pound fell by 1,800 points quite reasonably and logically. Thus, if we take the average pre-crisis levels of the pound ($ 1.26 - $ 1.29), it turns out that in the long term, the pound still continues to fall in price. And absolutely logical, from our point of view. Until more serious economic problems begin in the United States, the British pound has nothing to rely on in pair with the dollar. By the way, the American economy may have serious problems if, for example, China and the United States start a full-fledged "cold" war. Or, for example, if the "coronavirus" leads to a new "lockdown" in the country, which will inevitably affect the economy. While this is not the case, it is the British economy that remains in a weaker position. And this weak position continues to deteriorate due to the actions, or rather inaction, of the British government.

Trading recommendations:

In the 4-hour timeframe, the pound/dollar pair started a weak downward movement, barely anchored below the Kijun-sen line and failed to even exit the Ichimoku cloud yet. Thus, it is now recommended to consider short positions with targets of 1.2497 and 1.2454, but small lots, since the "dead cross" is now extremely weak. It is recommended to return to buy orders no earlier than when traders have crossed the Kijun-sen line with the goals of 1.2640 and 1.2705.

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EUR/USD: EU summit extended by 1 day as EU leaders settle neither budget nor recovery fund

4-hour time frame


For the whole week, EUR/USD was trading higher. The single European currency was advancing before the ECB policy meeting, after the meeting, and in the run-up to the EU summit. The summit is devoted to the two crucial questions. The first one is the long-term EU budget worth over €1 trillion for 2021 – 2027. The second item on the agenda is the €750-billion recovery fund aimed at reviving the EU economy after the pandemic-driven crisis. The underlying reason behind the euro's advance is optimistic expectations for the EU summit. Nevertheless, today is Sunday but the summit which kicked off on Friday is still underway. Obviously, the policymakers have not reached any compromise decision yet for two days. So, they are assembling again on Sunday. On the other hand, it is too early to say that the talks have failed. The stumbling block is the opposite stance of the 4 EU countries: Austria, the Netherlands, Sweden, and Denmark. They are against the idea backed by Germany and France that nearly €500 billion out of €750-billion fund will be allocated as grants among the worst-stricken countries. In other words, they will not be required any repayment. In essence, the countries which are suffering less damage from the pandemic and the related crisis are invited to pool the mutual fund to back those economies which have been disabled by COVID-19.

The question is delicate, so the Frugal Four countries give well-grounded reasons. The Northern countries are famous for their practical approach. They tackled the crisis more efficiently because they strictly controlled their public spending and did not waste budget money. Still, they have to solve the crisis in other countries at their own expense. President of the European Council Charles Michel tried to find a compromise decision and suggested that €450 billion should be provided as grants instead of €500 billion. Nevertheless, the Northern countries did not welcome his proposal. Besides, Charles Michel offered a discount on the EU budget fees for Germany, Denmark, Sweden, and the Netherlands. Thus, these countries will be able to save something in the future. According to some media, this proposal relieved tensions at the summit, but did not solve the disagreement.

It was only the Dutch delegates who cheered the lower amount for grants from the total €750 billion. They called this proposal "the step in the right direction". At the same time, Dutch Prime Minister also thinks that any financial aid for national projects should be approved by all EU leaders. Any country should have the right to veto funds for a particular project. Another thing is that the Dutch Prime Minister insists that all financial aid should be provided on condition of implementing reforms. For example, the funds could be allocated for environmental projects. When it comes to bailout credits, we mean reforms. "If then, loans have to be converted to a certain extent into grants, then the reforms are even more crucial, as well as the absolute guarantee that they have taken place," Mark Rutte stated.

Austria's Chancellor Sebastian Kurz also believes that the proportion between the amount of grants and loans should be different. Lately Finland joined the Frugal Four as an opponent of the EU-backed proposal. It goes without saying that Italy and Spain advocate this idea and insist on the soonest provision of grants. These two countries think it does not make sense to report such spending and conduct reforms in exchange.

To sum up, optimistic expectations have not come true. So, the euro could come under pressure on Monday, especially if the summit ends with a zero success. Judging by the first two days, the odds are that no decisions will be made. Such prospects are certainly bearish for the euro. I've already said that the euro has been growing in the recent months entirely amid events in the US. In other words, the negative fundamentals in the US are to blame for the US dollar's weakness. The euro is taking advantage of this. In fact, the whole eurozone's economy will be stuck in the doldrums without the rescue fund. Italy, Spain, Greece, and Portugal will bear the most strain of the crisis. Under the worst-case scenario, these countries could default on their debt. They will certainly face a GDP slump and retard their economic development for a few years. The problems could resurface not only in the economy. Italy could bring up the issue of leaving the EU in the nearest years if it does not see any reasons to stay in the EU. If Italy receives no financial aid, it will be discouraged to sustain its membership.

The final trading day this week ended without macroeconomic events. The EU reported a CPI for June which came out at 0.3% on a yearly basis. The index was neglected by market participants. In the US, investors got to know only a consumer sentiment index from the University of Michigan which was worse than expected. Earlier, I told you about an "unimportant" ECB policy meeting which took place on Thursday.

Thus, at the end of the week, we're seeing an accelerated uptrend of EUR/USD which could come to an end on Monday unless the EU leaders reach any consensus. At the same time, the lack of consensus will not worsen the economic background in the EU. So, nothing will change in principle. Therefore, the euro could extend its climb next week. In this context, I would advise you to be ready for a possible trend reversal on Monday – Tuesday. Please, don't try guessing. That's the best you can do. Make sure you follow technical indicators and their signals.

From the technical viewpoint, EUR/USD tested the previous local high of 1.1422 and closely approached the local high of 1.1496 recorded before the previous high. Thus, technical analysis signals that the uptrend could be terminated if the pair fails to surpass the level of 1.1496.

Trading tips

On the 4-hour chart, EUR/USD retains the prospects of the muted uptrend. At the end of the last week, the currency pair corrected towards the critical kijun sen line, but failed to sustain at the level below. Meanwhile, it would be a good idea to go long on rallies with target levels of 1.1452 and 1.1494. Short positions should be considered not until the price consolidates below the kijun sen line. Then, you could trade by small lots with the first target level of 1.1308.

The material has been provided by InstaForex Company -