The European currency and the British pound were once again under pressure in pair with the US dollar. The interview of the president of the European Central Bank was perceived by traders as a bearish signal, and the Bank of England's report on financial stability did not inspire much optimism among buyers of the pound. We will talk about all this in more detail below.
The June FOMC meeting was a turning point for the dollar. Before the Fed meeting, the position and sentiment on the dollar were mostly bearish. However, the number of short positions on the US dollar has significantly decreased, while the markets have somewhat softened the bearish sentiment. The Fed's subtle hint that inflation expectations have changed was a definite signal for the market. However, as the minutes of the Fed's June meeting showed, investors overestimated the Central Bank's intentions to resort to making changes to monetary policy soon. It harmed the US dollar last week, and it was not so easy to return to the market location. As it turned out, the FOMC is not going to adhere to a tougher policy in the near future, which hits short positions in the US dollar.
If the dollar is still more or less clear, then let's go through the interview of the president of the European Central Bank for the Financial Times. According to Christine Lagarde, the new strategy allows the ECB to be more flexible about the inflation target, which is now 2%. Lagarde noted that 2% is not a ceiling and prices will most likely fluctuate around this level. It may even exceed this value, which is also allowed. The European regulator has taken a similar position with the US Federal Reserve, which spoke at the beginning of this year about such a possibility to compensate for the losses of the previous period when inflation was near zero.
The ECB president also noted that the phrase "sustainable" is used to determine the level of inflation, and this suggests that the tightening of monetary policy cannot begin prematurely, as it was in the past. Lagarde said that during the next meeting of the Central Bank, the statements and strategy will be completely revised. In addition, there is a risk that the next meeting may cause panic in the markets since it will not take place in an atmosphere of unanimity. The opinions of representatives of central banks will always be significantly divided. However, Lagarde does not see any problem with this.
After the interview, the pressure on the European currency returned, as buyers of risky assets had nothing more to cling to. Before that, data on the German consumer price index was released, which increased by 0.4% in June this year and fully coincided with economists' forecasts. Annual inflation went beyond the 2.0% level and amounted to 2.3%, which corresponds to the ECB's goals and economists' forecasts. It also does not cause much excitement. As for the consumer price index harmonized according to EU standards, it amounted to 2.1% year on year.
The data for France even disappointed traders, as the growth of monthly inflation there has completely slowed down. The report indicates that the consumer price index increased by 0.2% every month, which coincided with economists' forecasts. Excluding tobacco products, inflation jumped by only 0.1%. On an annualized basis, the inflation rate fell short of 2.0% and amounted to 1.9%.
As for the technical picture of the EURUSD pair, the sellers of risky assets are still keeping the market under their control. The level of 1.1835 has now moved to the defense, and if the inflation data in the United States of America surprises traders, then its failure will quickly push the trading instrument to the base of the 18th figure, and then even lower - to the support area of 1.1740. It will be possible to talk about some more or fewer prospects for the growth of risky assets only after the bulls get out of the resistance of 1.1880, which will push the EURUSD to highs in the area of the base of the 19th figure and above - to the resistance of 1.1940.
GBP
The British pound reacted with a decline to the publication of the Bank of England's semi-annual financial stability report. Traders did not see anything in the report that could inspire them with some optimism. FPC expects to keep the UK CCYB rate at 0% until at least December 2021, and the rate of return to the standard CCYB rate in the UK in the region of 2% will depend on the bank's ability to restore capital, while it is necessary to continue supporting British households and businesses seriously affected by the coronavirus pandemic. As for the economic prospects, they have improved. However, the risks of a slower recovery remain, especially those associated with the spread of COVID.
As for the valuation of assets, it is fully reflected in the search for profitability in conditions of low-interest rates and an increased risk of further slowing down the economic momentum, although it is expected that the prices of risky assets will continue to grow further. As for lending and market financing, it should be more stable than it was before, and not increase the shocks, which are already enough after a year of the coronavirus pandemic. The FPC expects banks to use all elements of their reserve capital as needed to support the economy.
Immediately after the publication of the report, the governor of the Bank of England, Andrew Bailey, said that the FPC will continue to closely monitor the risks and vulnerabilities of debt, as enterprises in weaker sectors are much more vulnerable due to high financial costs. Bailey also noted that the mortgage market is currently being calibrated, and the valuation of assets may change dramatically if the markets reconsider their attitude to the growth of inflation and interest rates.
As for the technical picture of the GBPUSD pair, the bulls will defend the support of 1.3840. If strong inflation in the US returns the demand for the US dollar, then the bears will most likely achieve a breakdown of this level and the demolition of several stop orders of buyers who are under it. It will collapse the pound to the base of the 38th figure, and may also lead to a larger decline to the area of 1.3750. It will be possible to talk about the return of buyers of the pound to the market after the pair confidently overcomes the resistance of 1.3875, which will push the trading instrument to the area of the week's highs - 1.3905, and then even higher - to the area of 1.3940.
The material has been provided by InstaForex Company - www.instaforex.com