Once again, Donald Trump reminded the markets that the US is ready to increase tariffs by another $325 billion in Chinese imports, which negatively affected investor sentiment. The S&P 500 closed the day below the record at 3004.04. At the same time, the Asian markets also traded in the red zone on Wednesday morning while ignoring the news of Iran's readiness for negotiations, which led to a strong decline in oil prices.
Markets are preparing for the FOMC meeting on July 31 and pay attention primarily to the comments of Fed officials, not to macroeconomic data. Yesterday, Jerome Powell confirmed the main points of his speech to Congress, saying that the Fed is closely monitoring the risks of a slowdown in the US and is ready to act to support the expansion. In a similar vein, the head of the Federal Reserve Bank of Chicago, Evans, and the head of the Federal Reserve Bank of Dallas, Robert Kaplan, were interpreted by the markets as a willingness to reduce the rate on July 31.
EUR/USD pair
The ZEW business activity indicator continued to decline this month. In Germany, the decline from -21.1p to -24.5 exceeded forecasts for the eurozone and as a whole, the minimum decline from -20.2p to 020.3p. Nevertheless, this does not cancel the development of negative trends.
The main pessimism is associated with the continuing reduction of new orders in the German industry. Moreover, there are no signs that growing uncertainty can be overcome in the foreseeable future.
The ECB is preparing a new QE program, which should deter the strengthening of the euro. However, the Fed is also considering actions to change the liquidity policy following the latest FOMC protocols. The termination of the quantitative tightening will lead to the fact that excess liquidity in the United States stops reducing, while the Treasury will reduce its current account with the Fed, which will add liquidity in the banking sector. All these actions will in one way or another contribute to the weakening of the dollar and the EUR/USD rate will rise if the ECB does not take special measures to limit this growth.
The ECB meeting will take place on July 25 and until that time, the market will guess which trend will prevail that increases the uncertainty.
Today, Eurostat will present data on consumer inflation in June and forecasts are neutral. The euro has no direction and will most likely spend the day in a range whose lower limit is at the minimum of the week 1.1201 and the upper at 1.1233/38. A possible overrun is unlikely to be sustainable.
GBP/USD pair
The pound slowed down after the publication of a report on the state of the labor market over the past 3 months. Unemployment remained at 3.8%, which corresponds to the minimum since 1974 but wage growth rose from 3.6% premiums, excluding 3.4%. Both indicators exceeded forecasts, which eventually allowed the pound to stop the decline.
Two more important releases are expected before the end of the week, particularly the report on consumer inflation on Wednesday and data on retail sales on Thursday. Both reports will somehow clarify the picture of both consumer activity and inflation expectations. From this side, the pressure on the pound is likely to decrease and political uncertainty will remain the main negative factors.
It is expected that the new head of the Conservative Party and as a result, the Cabinet of Ministers will be the famous Euro-skeptic Boris Johnson. There are growing chances for a tough Brexit scenario, for a further fall in investments and a decrease in corporate income, which will lead to a reduction in tax collection and will force the Bank of England to look for ways to mitigate monetary policy.
Growing uncertainty significantly reduces the likelihood of a pound rising in the next two weeks, before the FOMC meeting. Corrective recovery is possible to the resistance of 1.2438, but the development of the downward movement is more likely after breaking through the important support of 1.2424. The pound can find the closest support in the 1.2270/90 zone and the long-term target moves to the level 1.18.
