The euro and the British pound are gradually declining against the US dollar before today's speech by Jerome Powell in the US Congress. But this article is not about that. Last week, the US Federal Reserve System, the European Central Bank, the Swiss National Bank, and the Bank of England continued, albeit to varying degrees, to take measures to curb inflation, which has already gone beyond all acceptable limits.
An interesting interview with the CEO of Deutsche Bank was published yesterday, who assessed the actions of politicians and made disappointing forecasts for the future. In his opinion, if there is a sudden cessation of Russian gas supplies to the EU, and this probability is very high, especially in the current geopolitical situation, the probability that the recession will come sooner than everyone expects will be much higher. According to Christian Sewing, the onset of the recession in Europe and the United States is only a matter of time. Developed economies are already facing a high probability of recession, as central banks are forced to aggressively tighten monetary policy to combat inflation.
It is worth recalling that consumer price inflation in the eurozone reached a new record high of 8.1% in May this year, after which, during its recent meeting, the European Central Bank confirmed its intention to start raising interest rates in July this year. Central bankers and economists around the world have already recognized that aggressive tightening, which may be necessary to curb inflation, is likely to lead to a recession in the global economy since its growth has also slowed significantly due to several global factors.
"We have such a difficult situation that the probability of a recession in Germany and Europe in 2023 is higher than we expected. But this is not only the influence of Russia's military special operation on the territory of Ukraine. It is obvious that the problems of such high inflation lie in the ultra-soft monetary policy pursued by the central bank," said Christian Sewing. Supply chains and the coronavirus pandemic have also had a big impact on inflation. "This is a very difficult situation. We now have three or even four driving forces that negatively affect the economy. All this happens at once and at the same time, which indicates a high probability of a recession not only in Europe but also in the United States," Sewing said.
Sewing is increasingly reluctant to rely on traditional models, which are unlikely to work well in the current situation. "I would say that inflation is what bothers me the most. I think the signals we have received from central banks are the right signals. It is necessary to act more aggressively," he said. "Inflation is the biggest poison for the economy."As for the prospects for the euro, the upward rebound did not last long. The Fed's policy does not allow bulls to take control of the market. Bulls need to show something around 1.0500, otherwise, the pressure on the trading instrument will only increase. Having missed 1.0500, you can say goodbye to hopes for the recovery of the pair, which will open a direct road to 1.0440. A breakthrough in this support level will certainly increase the pressure on the trading instrument, opening an opportunity for the test of 1.0380 and 1.0310. It is possible to talk about purchases and bulls' attempts to correct the situation, but only after an obvious return to 1.0550. Only after that, prospects for recovery in the area of 1.0600 and 1.0640 will open.
The reversal of the upward correction for the British pound today during the Asian session became a trigger for sellers who were just waiting for this moment. If the bears break below 1.2230, then the pound will go straight to 1.2170. Going beyond this range will lead to another downward movement already to a minimum of 1.2100, opening the way to 1.2030. It is possible to talk about a correction only after a breakthrough of 1.2320, which will lead to an instant breakthrough at 1.2365 and 1.2400, where buyers will face much greater difficulties. In the case of a larger upward spurt of the pound, we can talk about the 1.2460 updates.