The beginning of the reporting season in the US brought more questions than answers. Goldman Sachs and Wells Fargo increased by 2.3% and 5.5%, respectively, since they reported above-expected earnings. However, JP Morgan shares declined by 1.9% after the bank acknowledged serious problems with credit growth. The NASDAQ 100 Index also plunged from its all-time high after cryptocurrency exchange Coinbase came under heavy pressure after its IPO, leading to a sell-off in the tech sector.
On the other hand, Fed's Chairman Jerome Powell reiterated his dovish position, emphasizing that the Central Bank would scale back its asset purchase program well before any interest rate hike.
Today, the US dollar is likely to continue to decline as part of the correction.
EUR/USD
The ZEW indicator of economic sentiment in Germany and the Euro area as a whole showed a slight decline in optimism in April, which is most likely caused by the third wave of COVID-19 and the expansion of restrictive measures in a number of countries in Europe.
At the same time, the euro zone economy seems to have adapted to operate in a regime of constant restrictions and is still successfully coping. The German manufacturing PMI reached a new historical high of 66.6. The optimistic business expectations in both the manufacturing and services sectors, improved consumer confidence and a strong labor market provide a solid foundation for accelerating the recovery in the second quarter, but it should be noted that the record pace of recovery in industrial production has not yet been supported by a return on investment in the sector.
The ECB reiterated its promise this year to prevent a temporary surge in inflation. The pace of PEPP purchases in the current quarter will be increased noticeably, but the quantitative estimates of these purchases, as well as the ECB's intention to restrain euro's growth, are still unclear.
The Euro currency has been increasing for the second week in a row. However, this should be considered as a correction until the previous high of 1.2242 has not been broken through. The nearest resistance level is located at 1.2010, closing above which will increase the chances of continued growth, but the formation of a local high and a downward reversal is more likely. A slightly less likely is the transition to a sideways range and prolonged consolidation, until the ambiguities with the expansion of the pace of ECB purchases are gone.
GBP/USD
The NIESR Institute has provided a quantitative estimate of the expected level of UK GDP in Q1 and Q2. The assessment is positive, but with a significant warning, that is, if vaccination and exit from quarantine will meet the planned schedule presented some time ago by the Johnson government.
NIESR assumes that the decline in GDP in the 1st quarter will be 1.5%, but it is expected to grow by 4.6% in the second quarter, largely due to the possibility to realize the deferred demand in previously closed sectors of the economy.
In fact, all forecasts somehow come down to a pandemic, vaccination, and dealing with the consequences of COVID-19. Everything will be on schedule – the pound will get an incentive to grow, the third wave of the pandemic will come (fourth, fifth and so on), restrictions will remain, and real incomes will decline, which will reduce the pound's demand.
While the situation looks great, industrial production begins to slowly recover. However, the pandemic restrictions and Brexit have led to a severe deterioration in the trade balance.
The recovery of consumer demand is also questionable, even if the planned opening of the economy takes place. Despite the fact that there is an increase in average wages, the incomes of citizens are declining. If the rates on loans to individuals have remained practically unchanged for the past two years, the effective deposit rates sharply declined in the last year spring and are currently continuing to decline.
Accordingly, keeping money on deposits with high inflation becomes unprofitable, the savings of citizens decline, and the growth rate of retail sales and tax collection in the consumer sector remain very low, which leads to serious pressure on the current account amid the deterioration of foreign trade.
In 2021, the UK state budget deficit reached 16.9% of GDP, which is much worse than in the US. All hopes are for an earlier exit from quarantine with the help of advanced vaccination, but this factor has already been almost worked out. The main vaccine used in the UK – Astrazeneca has already been withdrawn from vaccination programs in a number of countries due to the high level of complications, and so, the UK has no advantage.
Technically, the pound remains under pressure. The correction growth can be suspended at the upper border of the channel 1.3820/30, and there is a rising probability of a downward reversal with a break through of the support level of 1.3665. The target is set at 1.3440/90.