Political uncertainty in the United States and Trump's controversial statements regarding the prospects for a trade agreement with China put pressure on investor sentiment, stock markets do not find reason to resume growth.
At the same time, macroeconomic indicators, primarily in one way or another are responsible for inflation, looked quite convincing this week. The housing price index rose by 0.4% in July, which turned out to be slightly better than expected. Other data released include a steady growth in August for new home sales and a price index of GDP for the second quarter. It increased by 2.6% against the forecast of 2.4%, and the forecast showed a rise in personal consumption prices. Inflationary expectations also seem to be on the rise, but business is in no hurry to adjust them. The yield of 5-year-old Tips inflation-protected bonds has been in a declining trend since April, forming a downward series of local lows. Furthermore, by the end of the week there are no signs of a reversal.
A business that assesses the trend better and deeper than consumers assumes that inflation will continue to decline and this means an increase in the likelihood of expanded stimulus measures by the Fed.
At the same time, the fact that the business reduces inflationary expectations even against the background of a decrease in the rate and the likelihood of the suspension of the Fed's balance sheet reduction indicates that the dollar is considered as a refuge even in such harsh conditions. In fact, this graph indirectly confirms that the recession in the United States cannot be avoided, and the fact that the dollar is strengthening with such trends indicates that the recession in most other countries is supposed to be even deeper.
By Friday evening, volatility may increase, as a number of important releases will be released. On personal income and expenses in August, orders for durable goods, and the consumer confidence index from the University of Michigan will also be published. There may also be surprises regarding the development of the situation with the impeachment of Trump. In general, an increase in demand for defensive assets is likely by the end of the week.
EUR/USD pair
After the unexpected resignation of ECB board member Sabina Lautenschlager , the German Ministry of Finance announced yesterday that it would soon propose a new candidate to replace her. Markets see her sresignation as a sign of hawks retreating, which may indicate that an internal discussion in the ECB is taking place in favor of expanding the incentive program.
ECB chief economist Lane has already said that the ECB has the opportunity to further reduce rates, citing Denmark and Switzerland as an example with interest rates of -0.75%. The development of events does not contribute to the growth of bullish sentiment on the euro. Furthermore, the update of the two-month low indicates the technical possibility of downward momentum.
Today, the European Commission will assess the mood in the business environment. Forecasts are moderately pessimistic and the output of data at the level of expectations will put pressure on the euro. There may also be surprises from speeches by the ECB Vice President Luis de Guindos and the head of the Bundesbank, Weidmann.
The support level of 1.0925 turned into resistance that will restrain recovery attempts. The closest target is the level of 1.0865, accounting for 76.4% of the previous wave. At the same time, it is located at the lower boundary of the channel.
GBP/USD pair
After the Supreme Court of Great Britain ruled that the decision to dissolve Parliament was illegal, the political situation in the country has somewhat calmed down but clarity was not added.
The pound lost the chance to develop momentum and downward. The current level of 1.2308 is at the same time as the first support, from which a slight pullback up to 1.2380/85 is possible. However, growth attempts are likely to be used for sales. The next most important support is at the level of 1.2269 and further to 1.2200 if the situation around Brexit does not bring new surprises.
