19/07/2021
Market Analysis
Last week
A set of robust economic statistics announced in the US failed to give a real boost to the American currency as the FED indicated a continuation of its accommodative monetary policy in the foreseeable future.
As a result, the USD ended the week somewhat higher than the previous weekly close with the EUR and the GBP faring about the same.
Crude oil prices lost ground on fears over the resurgence of COVID-19 cases and reservations about the prospect for an OPEC+ deal to increase supply.
The week ahead
The economic calendar for the coming week can note the ECB's interest rate decision on Thursday July 22. The rate is highly likely to remain unchanged, at 0%. Therefore, the sub-sequent press conference of the bank's management and its commentary on monetary poli-cy is of much greater interest.
According to Reuters, the ECB will have to decide at its meeting on Thursday what the new inflation target will mean for its future course. If the regulator is serious about raising inflation to 2% (compared to the previous target - close, but below 2%), then the large-scale purchase of assets is likely to continue.
But the "hawks" insist on curtailing incentives, and therefore investors will be interested in whether the head of the Bank, Christine Lagarde, will be able to achieve a certain compro-mise.
The Markit PMI values in Germany and the Eurozone will become known the day after the ECB meeting, on July 23, on the basis of which it will be possible to get an impression of the pace of the European economic recovery.
Technical Analysis
Last week
• EUR/USD. Macroeconomic data continued to arrive last week, indicating a recovery in the US economy and labor market. Inflation figures released on Tuesday July 13 were well above forecasts. Τhe consumer price index increased by 0.9% ιn June, and by 5.4% on an annualized basis, which is the highest growth rate since 2008. The core index, which excludes energy and food prices, has posted record growth since 1991, at 4.5% year on year. The number of primary claims for jobless benefits dropped by 26,000 to 360,000 from July 04 to 10. This is the lowest since March 20, when the coronavirus pandemic struck the economy first. Earlier this month, the US Depart-ment of Labor released data showing that the number of jobs in the country increased over the past month by 850,000 (up 583,000 in May).
The US import price index rose 1% in June, while import prices excluding oil rose 0.7% in June. The Fed-New York manufacturing index rose from 17.4 to 43.0 for the month, also well above the forecast. According to the Federal Reserve data released on Thursday July 15, industrial production in the US as a whole increased by 0.4% in June compared to May, which also indicates a good pace of recovery in the US economy.
By “pre-covid” logic, all this data would have strengthened the dollar seriously. How-ever, it has risen against the euro by just about 50 points in the past four weeks. And the pair has generally been in a sideways corridor with a minimal dominance of bears for the last two weeks: it traded in the range of 1.1780-1.1895 from July 05 to 09, and in the 1.1770-1.1880 range from July 12 to 16. These figures fully confirmed the compromise scenario presented by the experts. As for the forecast of graphical anal-ysis, it turned out to be almost perfect. Recall that it indicated a sideways trend within 1.1780-1.1900 on H4.
So why isn't the American currency growing? The reason lies in the hesitancy and doubts that still bedevil the US Fed. The head of this regulator Jerome Powell said speaking on July 14 at the Financial Services Committee of the US Congress that his department would not rush to tighten credit and financial policy and reduce the pur-chase of assets within the framework of QE. He repeated roughly the same thing the next day, in front of the Senate Banking Committee. Powell acknowledged that infla-tion is growing faster than expected, and if it goes beyond acceptable limits, monetary policy will have to be tightened ahead of schedule. But for now, the economy is “still far” from set goals. The rise in inflation, like many other factors, can be temporary. But after they disappear, they can be replaced by others.
Now, the spread of the new COVID-19 strain supports the dollar against commodity currencies, but there is no telling how the markets will behave in the future. It is un-clear how the early curtailment of the fiscal stimulus program will affect their mood as well.
As a result, having given all this portion of doubts to the congressmen, Powell assured them that the Fed was certainly monitoring the situation closely and would respond promptly to its changes. However, the head of the central bank was unable to influ-ence investor sentiment in any way (or perhaps did not want to), as a result of which the EUR/USD pair remained within a narrow trading range and completed the five-day period at 1.1805;
• GBP/USD. The pair failed to gain a foothold above the resistance of 1.3900 over the past week. As with EUR/USD, bears had a slight advantage, helped by positive eco-nomic statistics from the USA. Great Britain could not please with anything like that. And although the number of applications for unemployment benefits for the month decreased by 24% - from 151,400 to 114,800, the unemployment rate remained at the same level of 4.8% (instead of the forecast drop to 4.7%). Investors are also wor-ried about the onset of a new wave of COVID-19, due to which the number of new in-fections here has exceeded 50,000 per day. As a result, despite the fact that the bulls managed to keep the pair in the 1.3800-1.3900 channel all week, its lower border was broken on Friday, July 16 and the pair finished at 1.3760;
• USD/JPY. It was not possible to understand the sentiment of investors, as well as in-dicators, last week. The experts' voices were almost equally divided: 30% sided with the bulls, 40% with the bears, and 40% just shrugged their shoulders. The inconsisten-cy in the indicators' readings did not allow bringing their readings to any common de-nominator either. And, as the past five days have shown, it was this lack of forecast that proved to be the most accurate prediction: the USD/JPY pair drew a virtually per-fect sinusoid.
As expected, the Bank of Japan did not present any surprises on Friday, July 16, and did not surprise anyone with its inaction, once again confirming the country's reputa-tion as a super-safe haven for investors. Bank Governor Haruhiko Kuroda did not ut-ter a single new intriguing word during the press conference once again. Investors knew very well without him that the Japanese economy remains in a difficult situation, but the level of activity will increase as the population is vaccinated.
The balance of power between the dollar and the yen was not affected by the dis-crepancy in the macroeconomic indicators of the United States and Japan. As a re-sult, the pair ended the week almost where it started, at 110.05;
The week ahead
• EUR/USD. We talked about the doubts prevailing at the Fed in the first part of the re-view. In such a situation, the rare unity of analysts looks all the more surprising. Thus, 75% of them were voted for a stronger dollar and a decrease in EUR/USD, 25% for the side trend, and, respectively, 0% for the euro to rise. Perhaps the principle "if you are not sure, buy dollar" worked. According to 39 out of 41 Reuters experts, the Fed will curtail its monthly asset purchase program by $120 billion before the end of 2022. Three of them believe that this will happen very soon, this year already. The number of those who expect an interest rate increase in 2022, and not in 2023, is also grow-ing. Therefore, the consensus forecast for QE completion is in the next year, which supports the US dollar.
The new wave of COVID-19 is also playing on the side of the American currency, re-calling that it was during the pandemic that the dollar gained great importance as a re-serve currency. It should be noted that with the transition to the forecast by the end of summer, the number of supporters of a weakening dollar and a strengthening of the euro among experts increases from 0% to 50%. Graphical analysis on H4 still indi-cates a sideways trend within the channel 1.1780-1.1900. There is a mixture of red, green and neutral gray colors among the trend indicators and oscillators on H4, but the situation is different on D1: 100% of trend indicators and 85% of oscillators look down.
The nearest target of the bulls is 1.1880-1.1900, then 1.1975-1.2000, 1.2050 and 1.2150. The challenge before the end of summer is to update the high of May 25 1.2265. The bears' task is to test the March low of 1.1700. The nearest support on the way to this target is 1.1780.
GBP/USD. Experts are a little more optimistic about the future of the British currency than the future of the euro. So, 25% of specialists vote for the growth of the GBP/USD pair in the near future (as opposed to 0% for EUR/USD). The same is higher at the month and a half interval as well: 65% are bull supporters (the euro has 50%).
As for the technical analysis, there are only faint hints of a possible rise in the pair. 100% of trend indicators and 75% of oscillators are colored red on H4 (the remaining 25% are in the oversold zone). 85% of trend indicators and 75% of oscillators look south on D1. Support levels are 1.3740, 1.3700, 1.3670 and 1.3600, resistance levels are 1.3800, 1.3840 and 1.3900. The further target of the bulls is the upper border of the medium-term channel 1.3700-1.4000;
• USD/JPY. As in the case with the previous two pairs, in this case, the majority of ex-perts (70%) expect the dollar to strengthen and a new attempt by the pair to gain a foothold above the level of 111.00. Such a forecast comes into a certain contradiction with the indications of technical analysis on D1. Here 65% of oscillators and 80% of trend indicators are colored red. As for the graphical analysis, it draws the movement of the pair in the range of 109.70-110.40 on H4, with a subsequent fall to support at 109.30. The range of fluctuations is somewhat wider on D1: first, the fall to the zone 108.65-109.30, and then the rise to the resistance 111.00 and further growth to the Ju-ly 02 high, 111.65;
