FX.co ★ Speculative overheating (Review of EUR/USD and GBP/USD on 07/17/2020)

Honestly, things were nonsense yesterday although formally, everything seems to be normal and logical. Initially, the dollar was steadily losing ground against the single European currency and the pound. And from the point of view of initial speculation, this was quite justified. Market participants were waiting for the results of the meeting of the Board of the European Central Bank and the subsequent press conference, Christine Lagarde. Considering that no one expected anything from such a landmark event, that given the accumulated overbought common European currency and the pound can be regarded as a negative factor, it is quite logical to drive the main European currencies as high as possible, so that they are as expensive to sell in the future. And after all, the European Central Bank did not deceive the expectations of market participants. Indeed, not only did the current monetary policy of the regulator undergo no changes at all. In addition, the speech of the head of the European Central Bank was completely faceless even nothing was said about plans and forecasts. We limited ourselves to repeating on-duty phrases about all good versus all bad. Like, you need to monitor the situation and so on and not a word about how the European Central Bank will behave in these very changing conditions. So after that, the dollar should have grown steadily which is exactly what happened. However, with one small problem. All this happened only a few hours after the speech of Christine Lagarde. More precisely, about six hours later, that is, even much later than the publication of American macroeconomic statistics. And all this time, the single European currency and the pound continued to grow, despite the excellent US statistics and the speech of Christine Lagarde. Therefore, the speculators went too far and this should be remembered today.

Separately, we should focus on yesterday's British statistics on the labor market, which only caused confusion again, especially touching is the unemployment rate, which miraculously continues to stand still. That is, there is a complete mess in the world: people are losing their jobs and shops are just beginning to show signs of life, but contrary to this, everything's just wonderful in the United Kingdom. And the funny thing is that the unemployment rate continues to remain unchanged, even despite the reduction of employment by 126 thousand. Thus, it is not surprising that the pound even declined for some time. Investors did not strongly believe this data. And since there is no trust in official statistics, then there is no understanding of what exactly is happening. And this is the uncertainty that scares investors the most. In this case, distrust causes only unemployment, while the remaining indicators quite fit into the logic of events. Even a decline of 28.1 thousand in the number of applications for unemployment benefits does not raise any questions. The main shaft of layoffs and cuts went a little earlier, so that the influx of people into employment services should already be gone. In addition, the business is gradually trying to reanimate itself, so that the growth of unemployment would have to stop. The situation with salaries looks especially wonderful, as they confidently declined. In particular, the growth rate of average wages slowed from 1.7% to 0.7%. But here, the growth of salaries taking into account bonuses and overtime by 1.0% was replaced by a decline of 0.3%. And it is completely incomprehensible how in this situation the unemployment rate has long remained around 3.9%. It is obvious that this indicator is considered in some special way in the UK.

Unemployment Rate (UK):

The US statistics, which traders noticed only six hours after its publication, makes an extremely pleasant impression. And only the initial applications for unemployment benefits were a little disappointing, the number of which declined from 1,310 thousand to 1,300 thousand. Nevertheless, they were waiting for a decline to 1,290 thousand. The number of repeated applications decreased from 17,760 thousand to 17,700 thousand, and up to 17,338 thousand. In turn, retail sales were more pleasing the decline rates of which were to slow down from -5.6% to -3.0%. But they began to grow in annual terms. The growth rate was 1.1%. In other words, there are more and more signs of a confident recovery in economic growth in the United States, which is good news.

Retail Sales (United States):

So, the main event of today is the publication of inflation in the euro area. Consumer price growth should increase from 0.1% to 0.3%. It seems like this is an extremely positive factor. But there are two important points. Firstly, a preliminary assessment showed such results, which means that the market has already laid this fact in the value of the single European currency. Secondly, yesterday's speculative surge showed once again that both the pound and the single European currency are speculatively overheated. Consequently, their growth potential is seriously limited. Moreover, there is a suspicion that sometimes the unjustified growth of the single European currency is due to the expectation that inflation data will be better than forecasts. This is indicated by data for individual countries in the euro area, especially inflation in Germany. In other words, market participants put in advance in the cost of the single European currency at a slightly higher rate of growth in consumer prices than expected. And it turns out that even if inflation comes out better than forecasts, the single European currency has nowhere to grow.

Inflation (Europe):

The dollar, which is clearly oversold, has every chance of good growth. Moreover,another batch of positive macroeconomic data is expected today. So, the volume of construction of new houses should increase by 12.9%. And not only does construction grow, it will continue to grow further, as the number of issued building permits may increase by 2.5%.

Number of Building Permits (United States):

The single Eurocurrency can even rise to 1.1450 temporarily. In general, the euro will decline to the level of 1.1350 and to 1.1300 in the medium-term.

The pound is not overheated so much, so it is necessary for some speculative surge in it. Rather, we should expect its gradual decline to 1.2500.