The US dollar rose against its major currencies during the European session on Friday, as US Treasury yields returned to their highs after President Joe Biden signed a package of measures to combat COVID-19. This again led to an increase in expectations of a faster inflation jump in the second half of the year. Let me remind you that Biden signed a bill worth $ 1.9 trillion, which was his first major legislative victory since taking office as president of the United States in January 2021. Immediately after the signing, Biden promised to take active measures to speed up vaccination and return the country to normal economic functioning by mid-summer.
Meanwhile, 10-year US bonds collapsed: the decline in US bonds led to an increase in their yield to 1.59% - almost the highs of this year, which pulled up the US dollar.
In the meantime, the United States and the United Kingdom are lifting quarantine restrictions and preparing for a return to normal life – the weak pace of vaccination in the eurozone countries and the hasty opening of economies are already beginning to affect the growth in the number of infections. The Italian government is once again considering closing schools, restaurants, and shops across much of the country, as a new wave of coronavirus disease puts an excessive strain on hospitals. Prime Minister Mario Draghi will soon hold a cabinet meeting to decide on new restrictions for the eurozone's third-largest economy, which saw nearly 26,000 new COVID-19 cases and 373 deaths on Thursday. And although Italy is not the leader in the number of infections, more than 100,000 people have already died from the coronavirus, and the pandemic has not been completely defeated. Most likely due to a new surge in the pandemic, or to be more precise - its more contagious strain of coronavirus, more densely populated northern regions of Italy, such as Lombardy, which includes Milan, will again be introduced quarantine measures with the classification "red zone" - the level of the highest risk.
This news also did not give investors confidence in the future recovery of the region, as the fact of an outbreak of coronavirus in other EU countries is not excluded.
Speaking of today's statistics, it is necessary to mention the report of Eurostat, according to which industrial production in the euro area in January this year increased more than expected. Industrial production rose 0.8% from the previous month, after falling 0.1% in December. Economists had expected growth of only 0.2%. On an annualized basis, industrial production increased by 0.1%. Domestic demand is expected to continue to grow at a slow pace this year, but industrial exporters can benefit from strong growth in external demand.
The German inflation data was not surprising. The Destatis report said that the consumer price index rose 1.3% year-on-year after rising 1.0% in January, which fully coincided with the preliminary estimate. Prices rose for the second month in a row. Compared to the previous month: the consumer price index rose 0.7% in February after rising 0.8% in January. Eu-standardized inflation remained stable at 1.6% in February. Energy prices rose 0.3%, while food prices rose 1.4%.
As for the technical picture of the EURUSD pair, the bears pushed the trading instrument into the support area of 1.1935 and are now trying to protect it. If the trading week ends below this level, most likely the pressure on the euro will continue and then we will see tests of the lows of 1.1890 and 1.1835 in the near future. If the bulls still manage to find the strength and close the week above 1.1935, we can expect a continuation of the upward correction of the pair, but a lot will depend on the expectations of investors and the growth of bond yields, which, as we know, leads to a decrease in demand for risky assets.
GBP
The British pound fell against the dollar today for the same reason as other risky assets: and although the report on the UK economy was better than economists' forecasts, there is still little good in it. According to the data, UK GDP contracted less than expected in January. A report from the Office for National Statistics said gross domestic product fell 2.9% month-on-month in January, after rising 1.2% in December 2020. Economists had expected a reduction of 4.9%. The monthly decline was mainly driven by a drop in consumer-focused services and education. The report showed that services production fell 3.5% in January, while industrial production fell 1.5%.
Another report from the ONS showed that the UK's trade deficit narrowed to 9.82 billion pounds in January 2021 from 14.3 billion pounds in December. The ONS believes that the decline in exports and imports was not due to Brexit, but economists have increased the chances that Brexit will have a longer-term impact on trade flows than previously expected.
As for the technical picture of the GBPUSD pair, the bears stopped only in the support area of 1.3880, however, there is no active growth from this level. Most likely, the pound will end the week in positive territory, but today's downward correction threatens the correction trend observed at the beginning of this week. A break of 1.3880 will quickly push the trading instrument into the area of the lows of 1.3830 and 1.3780. It will be possible to talk about the return of the market by the bulls under their control only if the price returns to the resistance of 1.3940, from which you can count on more active purchases by large players in the area of the highs of 1.4000 and 1.4060.