The latest speech of ECB president Christine Lagarde, together with a bleak outlook for economic recovery, put pressure on the European currency. In addition, intensifying incidences of COVID-19 raises the risks of another quarantine, which supports demand for safe haven assets, that is, the US dollar in particular.
In an interview, Lagarde changed her rhetoric regarding exchange rates, expressing her opposition to super-strong European currency. According to her, a cheap euro will help the economy to recover more actively in the future, while a more expensive one will create additional problems for exporters and significantly affect inflation.
The euro area's inflation, which is already near deflationary values, came out at the recent report as well below the target 2% inflation rate of the ECB. The August CPI of the European Union fell 0.2% year-on-year, so much lower than the earlier 0.4% rise in July. In addition, core inflation has slowed to 0.4%, but this is due to sales problems in tourist countries such as France and Italy. The serious pressure on inflation is actually from the temporary reduction of VAT in Germany. Nevertheless, this low inflation did not cause problems to the central bank.
Going back to the euro, the bears are now focused on working for a breakout and consolidation below last week's lows, the success of which will decline the quotes to price levels 1.1695 and 1.1645. However, a reversal could occur on the grounds of more active bulls in the market, and such will be able to return the quotes to price level 1.1795, or even price level 1.1870.
As for the EU economy, Lagarde's fears about a slowdown are not unfounded, especially since another surge in coronavirus infections has been observed in Europe. If the governments are forced to reintroduce lockdown or quarantine, a stronger collapse could happen in the economy. But if not, recovery may continue, but not as strong and fast as expected.
Another dismal report was the possibility that the ECB will make the current emergency PEPP program into a longer-term asset purchase program, which may cause negative reactions and lead to a decline in the EUR / USD pair.
Meanwhile, Fed chairman Jerome Powell gave positive outlooks for the US economy, noting that activity is already growing in most sectors, and that many indicators point to further noticeable improvements.
One of these was the index of national activity, which was calculated by the Chicago Fed. According to the data, activity in August was at a level of 0.79, a bit lower than the previous data, but is still an indication of recovery.
GBP / USD
As for the British pound, a continued decline is seen all over the market, and this is largely due to intensifying COVID-19 incidence in the United Kingdom. The surge in cases increases the risk of another lockdown or quarantine, which, if re-introduced, will decrease the demand for the pound to historically low levels.
Thus, for the technical picture of the GBP/USD pair, everything depends right now on how quickly the bears will be able to break the support level of 1.2775. If the bulls were inactive in the market, the pound is likely to fall further to the lows of 1.2675 and 1.2585. But if they were, the quotes could return to the resistance level of 1.2870, a breakout above which will push the pair up to 1.3000.