FX.co ★ Big changes await us all (review of EUR/USD and GBP/USD on 06/01/2020)

Over the weekend, everyone was busy blaming Jerome Powell or the wave of protests that swept the United States for the weakening of the dollar. But this will only partially be true. Yes, indeed, the protests quickly developed into full-fledged clashes with the police, and it came to the point that curfews had to be imposed in some cities. At the same time, everyone connects these protests with another case of a black man killed by police officers. However, the protests have been growing for several days, and they reached their climax over the weekend. In other words, the protest wave itself was nothing new. But it is noteworthy that if you look closely at the photos from these rallies and marches, then next to the traditional posters calling for stopping police brutality, a huge number of banners with calls to immediately abolish restrictive measures and give people a job are comfortably placed. People psychologically can no longer tolerate all this, especially since millions have lost their jobs, and in the conditions of limited quarantine, they have no hope of finding a new job. This means that there is a question of how to feed families. But the United States, although it removes restrictive measures, does so in a chaotic way. Some States are starting to relax, and others are starting to do the hell with it. People are in a situation of complete uncertainty. This is what sets the United States apart from Europe, where the situation is much calmer and the removal of restrictive measures is proceeding steadily and steadily. And most importantly, the authorities of the European Union clearly indicate the timing and scope of easing. So the Europeans are in a much better position. But all these protests and the use of tear gas happened over the weekend, so at best they only explain the continuing weakening of the dollar since this morning.

In many ways, the weakening dollar is connected precisely with the situation of uncertainty, as well as with surprising statements by Jerome Powell. Here, a whole comedy unfolds. They all unanimously shout that the head of the Federal Reserve System signed for his own impotence, claiming that the regulator did everything possible to support the US economy. And there is a feeling that Jerome Powell specifically said this so that the amazing titans of thought did not hear the most important thing. But in fact, the head of the Federal Reserve System announced exciting reforms of labor legislation. He made incredibly wise (the word should be put in quotation marks) inferences about the unprecedentedly high unemployment rate in the United States. According to him, people simply do not want to work. Yes, that's it. However, he somewhat clarified his idea that this is largely due to some difficulties. They say that because of the coronavirus epidemic, people are afraid to leave their homes, and because of the confusion and chaos, schools and kindergartens are still closed in many States, and parents have no one to leave their children with. So it's not that simple. But the most important statement was that many simply do not see the point of looking for work, since unemployment benefits are quite high and wages are only slightly higher. Well, employers cannot raise salaries, as there is cheap labor in other countries of the world. And of course, raising salaries is a direct way to reduce profits, which in no case should be allowed. And such statements clearly hint that in the United States, at least the Federal Reserve and the Treasury Department, are considering revising the size of unemployment benefits. However, all this is quite logical. The fact is that the number of people receiving benefits has grown catastrophically, and the budget deficit for Washington is a chronic disease. An unprecedented increase in unemployment has become a test of this system for strength. Feeding such an army of unemployed is an overwhelming work that can ruin any economy in the world, even the American one. And Jerome Powell, in fact, offers the easiest and most beloved way among many officials around the world - to cut social spending. However, the head of the Federal Reserve System is not the last person in the world, especially when it comes to money. And most interestingly he said it just on Friday. But there is one such strange moment, namely, that Jerome Powell's words are contrary to the contents of the many banners with which people took to the streets of American cities this weekend. So a weakening dollar should not be surprising. Whatever one may say, but amid mass protests, which then had not yet developed into clashes with the police, some kind of revision of measures to support the unemployed cannot lead to anything good.

Moreover, many were most likely waiting for such words from the head of the Federal Reserve System, since the dollar stubbornly lost its position all day. Although preliminary data on inflation in Europe will make anyone sad. Inflation itself fell from 0.3% to 0.1%, which turned out to be slightly worse than forecasts. They were waiting for a decline to 0.2%. The trouble is that consumer prices fell 0.1% in monthly terms. That is, this is practically the beginning of deflation. And in theory, investors should have fled from the single European currency. However, it was already starting to smell fried for real in the United States. Investors do not like to enjoy the smell of burning shops. So the dangerous decline in inflation was simply ignored.

Inflation (Europe):

Exactly the same thing happened with the pound, which generally had to grab its head from one type of data on car production. After all, the volume of production has collapsed from 78,767 units to 197 cars. Such a volume of production was probably only at the very beginning of the automobile industry. At least in the last fifty years, only once has monthly production dropped below 50,000 cars. And even then, it was only in the very early 80's. And the car production itself is just the tip of the iceberg. A huge number of related industries are tied up in this case, which also had to reduce the volume of production. Therefore, the whole industry is in a state of coma. After all, in fact, an entire industry has literally disappeared.

Car Manufacturing (UK):

The situation of the dollar was further worsened by the complete nonsense that US statistics were. On the one hand, personal expenses declined by 13.6%, which is not surprising, since given the restrictions imposed due to the coronavirus pandemic, as well as the unprecedented increase in unemployment, there's no reason to talk about some shopping and entertainment centers. However, personal income rose by 10.5%, which is generally on the verge of absurdity. And frankly, this has only two possible explanations. The first is that American statistics are not reliable, and even possibly artificially drawn. Agree that this prospect is not very conducive to serious investment. It is difficult to invest money where it is generally not clear what is happening with the reporting. But the second possible explanation, which is much more fun, is that employers, using force majeure circumstances, massively reduced staff, and saved the money on their salaries in their pocket in the form of additional bonuses and the like. And against the background of the demands of many protesters who came up with posters saying that they have nothing to feed their families, this explanation seems somewhat more plausible. And against this background, the words of Jerome Powell generally sound like the devil. After all, it turns out that in the United States, which already occupies one of the leading places in the world in terms of the gap between rich and poor, this very stratification has only grown even more.

Personal expenses (United States):

As already noted, the dollar continues to become cheaper, and at the moment, there is quite a decent explanation for this. In Europe, an increase in the index of business activity in the manufacturing sector is expected from 33.4 to 39.5. Of course, the index itself will continue to remain incredibly low, but the fact of its growth suggests that European manufacturers see at least some glimmer of hope and are counting on the start of recovery.

Manufacturing Business Activity Index (Europe):

Despite the catastrophic failure in the automotive industry, the growth of the index of business activity in the manufacturing sector is expected in the UK. Here, the index should grow from 32.6 to 40.6. Everything is simple. Auto production data for April, and index production for May cannot decline forever and it should begin to recover sooner or later. And apparently, British industrialists see some improvement in prospects.

Manufacturing Business Activity Index (UK):

But the fun part will begin to happen with the opening of the American session. After all, the United States also expects the growth of the index of business activity in the manufacturing sector, from 36.1 to 39.8. In addition, all these protests and clashes with the police will fade into the background. After all, the American police are still champions of humanism and other pleasures of life. After what happened on the weekend, the police will severely suppress even hints of protests and mass gatherings of people. It's not just that curfews have already been imposed in a number of cities. So the apparent normalization of the situation and good macroeconomic data will help strengthen the dollar.

Manufacturing Business Activity Index (United States):

On top of all the above, there is also a clear oversold dollar, so that the single European currency can decline to the level of 1.1105 or likely even lower to 1.1075.

Same thing works for the pound, but Brexit still hangs over it. We are talking about the pointless negotiations on the trading part of the agreement. IAfter all, over the weekend, negotiators from the European Union already openly stated that London should moderate its appetites, and bring its demands in line with the real state of affairs. This is because the wish list of Great Britain is more like the wishes of a fickle princess from another silly fairy tale.