Yesterday began with impressive European data on business activity indices, which led not only to the growth of the euro, but also other currencies. The Euro currency pulled everyone else along with it through the dollar index and indeed, there were enough reasons for optimism. The worst result was shown by the index of business activity in the manufacturing sector, which remained unchanged. However, they were waiting for its decline from 63.1 points to 62.2 points. The index of business activity in the service sector, which was supposed to rise from 55.2 points to 57.6 points, increased to 58.0 points. As a result, the composite index of business activity grew from 57.1 points to 59.2 points, against the forecasted growth of only 58.9 points. Therefore, it is not surprising the single European currency has sharply risen.
Composite PMI (Europe):
In turn, the pound should commend the euro, because if it were not for its growth, the British currency would definitely decline. Contrary to the euro area, the UK business activity indices, which are expected to fall anyway, came out significantly worse than predicted.
For example, the index of business activity in the service sector slips to 61.7 points instead of falling from 62.9 points to 62.5 points. The manufacturing index also declined from 65.6 points to 64.2 points against the forecast of 64.5 points. As a result, the composite PMI fell from 62.9 points to 61.7 points, although it was expected to decline only to 62.7 points. Fortunately, the euro pulled the pound sterling with it through the dollar index.
Composite PMI (UK):
However, a real madness began on the market after the opening of the US trading session since the US dollar began to grow actively, despite the failed statistics from America. The only thing that was somewhat pleasing was the index of business activity in the manufacturing sector, which rose from 62.1 points to 62.6 points, although it should have fallen to 61.0 points. But this does not matter, since the PMI in the services sector, which is more important, collapsed from 70.4 points to 64.8 points. It was expected to decline only to 69.0 points. As a result, the composite business activity index, which should have dropped from 68.7 points to 67.0 points, fell to 63.9 points. Moreover, sales of new homes decreased by 5.9% instead of falling by 2.1%. As we can see, the US statistics were extremely disappointing but the US dollar was rising. The answer to this question has to do with the Federal Reserve System. More precisely, with the expectations that were placed on the speech of Michelle Bowman. After the meeting of the Board of the Federal Commission on Open Market Operations, it was announced that there were plans to tighten monetary policy, but the issue of the quantitative easing program remained open.
The US regulator announced that the issue of reducing the program will be considered before the end of this year. This means that, in addition to raising interest rates, the market will lose the flow of extra, and most importantly free, US dollars. So, there were strong assumptions that representatives of the Fed may soon declare that it is not about reducing or curtailing the quantitative easing program, but only about considering such a possibility, and that there is no reason to worry. However, Bowman did not voice anything of the kind. She did not mention the quantitative easing programs at all.
In this situation, many market participants made a simple conclusion – the quantitative easing program may begin to be curtailed next year. There will be less dollar liquidity in the market, which means that the US dollar will become more expensive. That's all that happened yesterday.
New Home Sales (United States):
Today's key event is the meeting of the Board of the Bank of England, which may further strengthen the US dollar. The fact is that the Federal Reserve System has already announced an increase in the refinancing rate, planning it for the middle of next year. The European Central Bank has so far only limited itself to hints, but, apparently, it will follow the example of the US regulator in the near future and also announce a tightening of monetary policy. It is logical to expect the same from the BoE. However, both the ECB and the FRS are forced to do this not because of a good life, but because of the rapid growth of inflation. And they can talk as much as they like about the fact that the increase in inflation is temporary and so on, but there is no denying that this threatens not only economic growth, but also social stability.
So, the Bank of England's situation is somewhat different, since UK inflation is noticeably lower, and it is growing much more slowly. This means that the Bank of England has room to make a change. The British regulator may limit itself to routine statements and leave everything as it is. After all, an increase in interest rates will negatively affect the pace of economic recovery. But if interest rates rise in Europe and the United States, so will the profitability of investments in their government securities. If this happens, the pound will become less attractive and weakens, which will slightly pull other currencies along with it through the dollar index.
Refinancing rate (UK):
At the same time, the US dollar will receive more support from its own statistics. First, we are talking about orders for durable goods, which are expected to rise by 2.0%. This is quite good and indicates a further increase in consumer activity at least in certain segments.
Meanwhile, the data on applications for unemployment benefits will hardly make an influence. On the one hand, the number of initial requests may be reduced by 52 thousand, but the number of repeated requests should rise by 2 thousand. The repeated applications are more important but their number should remain almost unchanged. In general, the forecasts for applications are fairly positive.
Durable Goods Orders (United States):
During the corrective movement from the support point of 1.185, the EUR/USD pair reached the important price area of 1.1950/1.2000, where there was a reduction in the volume of long positions. It can be assumed that if the price is kept below the level of 1.1905, the correction will end, and a recovery process will take place.
The GBP/USD pair is moving within the borders of the psychological level of 1.3950/1.4000, where a slight slowdown was observed in the market. In this case, much will depend on which border the quote will stay outside, as this may indicate a subsequent speculative movement.