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FX.co ★ EURUSD and GBPUSD: Traders sharply recalled Brexit and negative interest rates in the UK

EURUSD and GBPUSD: Traders sharply recalled Brexit and negative interest rates in the UK

The European currency is not feeling in the best shape at the beginning of autumn this year against the background of major profit-taking, which occurred after the recent statement of the ECB's Governing Council, Philip Lane. This triggered the closing of several long positions on risky assets. I have also already paid attention to this point, as hard times are still ahead for the euro. Although some fundamental data that are persistently ignored by the market do not affect the euro exchange rate, this does not make the European Central Bank's problems any less. The self-evident strengthening of the euro will also harm exports because it will make national goods more expensive, which will not add to optimism in a weak economy. Many assume that at its next meeting, the European Central Bank will still tighten its rhetoric against the euro and take additional monetary stimulus measures, which may negatively affect the quotes of risky assets and lead to their decline.

EURUSD and GBPUSD: Traders sharply recalled Brexit and negative interest rates in the UK

However, many experts already say that the ECB has enough space to fight the further strengthening of the single European currency and the reversal of this trend in the coming quarters. However, while the yields of American and some European securities will be similar, and all because of a sharp decline in the attractiveness of treasuries and a sharp rise in the price of gold, it will be wrong to talk about a reversal of the upward medium-term trend in the European currency. Most likely, even against the background of negative fundamental statistics on the Eurozone, which will cause downward corrections, the general trend for strengthening the euro will continue. The only moment that can affect the euro exchange rate in the short term is a technical correction.

An unsuccessful attempt to take the 20th figure at the end of summer and the first days of autumn resulted in a sell-off of risky assets, which can only get stronger. The only hope remains the September meeting of the European Central Bank, before which the euro may remain afloat. Most likely, major support levels will be concentrated in the area of 1.1760, as a break in this level will lead to a more powerful sell-off of risky assets already in the area of 1.1710 and 1.1590. It will be possible to talk about the return of control over the market by euro buyers only after the trade returns above the level of the 19th figure. Only after that, you can count on a repeat test of the maximum of 1.2000 and its breakout. However, this requires adequate fundamentals, although the weakness of the US dollar, which depends on the attractiveness and yield of US bonds and demand for gold, may again lead to the uncontrolled growth of the euro.

Today's statistics on activity in the services sector of the Eurozone countries once again prove the cooling of the bullish momentum of the European economy. Germany is the only country that has managed to demonstrate a more or less stable state of health. Repeated outbreaks of coronavirus infection have slowed the recovery of the economies of Italy and Spain. The risk of a second wave of the epidemic is also holding the back activity in the service sector due to low demand. The maintenance of social distancing measures and the quarantine regime in some European countries also do not improve the situation of the service sector.

According to a report by Markit, the purchasing managers' index (PMI) for the Italian services sector in August this year fell below the 50-point mark, indicating a reduction in the activity. Low tourist flow against the background of the coronavirus pandemic in late summer did not allow the indicator to stay above the growth mark. So the index fell to 47.1 points in August, against 51.6 points in July. The PMI for Italy's services sector was forecast at 49.0 points.

Another problem for Italy remains employment, which is likely to continue to decline in the next 12 months. The end or partial curtailment of the employment support program, which assumes a reduced working day, the end of which is December 31, will necessarily lead to a sharp increase in the unemployment rate. Let me remind you that employment increased in July for the first time since February, but at the same time, the unemployment rate rose to 9.7%.

Meanwhile, in France, the same purchasing managers' index (PMI) for the services sector in August this year fell to 51.5 points, against 57.3 points, while it was forecast at 51.9 points.

EURUSD and GBPUSD: Traders sharply recalled Brexit and negative interest rates in the UK

As noted above, Germany has more firmly experienced the final stage of summer growth. There, the purchasing managers' index (PMI) for the services sector in August was 52.5 points, up from 55.6 points in July, while a decline of 50.8 points was forecast. The German labor market is also returning to its former form. At least the IFO Institute report shows that the number of part-time employees in Germany fell to 4.6 million in August. The share of part-time workers in the total number of employees fell to 14% from 17% in July.

In the Eurozone as a whole, the purchasing managers' (PMI) indices for the services sector managed to keep the territory above 50 points, however, the line is quite close. We learned above that there is a very sharp difference in the recovery of activity across the Eurozone countries. According to the data, the purchasing managers' index (PMI) for the Eurozone services sector in August was 50.5 points, compared with 54.7 points a month earlier. The indicator was projected at 50.1 points. The composite index, which takes into account both the service sector and the manufacturing sector, was at 51.9 points in August, up from 54.9 in July.

EURUSD and GBPUSD: Traders sharply recalled Brexit and negative interest rates in the UK

Another report on retail sales, which reflects how quickly the pace of recovery in the Eurozone is slowing, disappointed traders. The EU statistics agency noted a 1.3% decline in retail sales in the Eurozone in July compared to June. Economists had forecast an increase of 1.2%. As you can see, the deferred demand is coming to naught, as well as the easing of restrictions on the operation of stores. Compared to the same period of the previous year, retail sales in the Eurozone increased by 0.4% in July.

GBPUSD

Meanwhile, the British pound continues to actively lose its position against the US dollar, having played the technical model of a head-to-shoulders reversal. The breakout of the large support of 1.3310, which was not possible yesterday, led to a new wave of the decline of the trading instrument to the area of the lows of 1.3240, keeping the larger level of 1.3165.

The continued growth in activity in the UK services sector in August did not help the bulls implement their plans to return the pound to the level of 1.3380. According to a report by IHS Markit and CIPS, the purchasing managers' index (PMI) for the UK services sector in August was revised up to 58.8 points from a preliminary reading of 60.1 points. Back in July, the indicator was equal to 56.5 points. Index values above 50 indicate an increase in the activity. But many economists continue to emphasize that the current figures should not be perceived as the most accurate, as the UK government is taking active measures to support the economy after the coronavirus crisis.

EURUSD and GBPUSD: Traders sharply recalled Brexit and negative interest rates in the UK

The pressure on the pound is expected to return in early autumn when the next round of trade negotiations between the UK and the EU is about to start. In front of investors, the Bank of England is also waving the possibility of introducing negative interest rates in the UK in the autumn of this year. And although the Governor of the Bank of England, Andrew Bailey, recently stressed that the Central Bank does not currently plan to lower rates into negative territory, it is not certain that it will not change its mind tomorrow.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade
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