FX.co ★ Let's not think about the bad (EUR/USD and GBP/USD review on March 3)

Yesterday's European macroeconomic statistics were actually surprising. Nevertheless, the euro and the pound stopped declining during the European session. And as soon as the US trading session opened, Euro currencies managed to recover some of its previous losses from the last few days. On another note, investors reacted to the stability of inflation in Europe, which was shown in the preliminary data. This is despite the fact that inflation was expected to rise from 0.9% to 1.0%. In fact, a number of indirect factors indicated that inflation will most likely slowdown. Therefore, the fact that it remained unchanged was perceived as a positive factor. However, the situation is quite alarming. In particular, Germany's growth rate of retail sales by 2.8% was replaced by a decline of almost -8.7% in January. Inflation data was published this month.

It turns out that as soon as consumer prices began to rise, and Europe's inflation data appeared in January, consumer demand immediately collapsed. This means that the profits of sellers and manufacturers are not rising, as rising prices are completely thrown off by falling demand. In this case, we need to talk about a decline in the companies' profits, which could lead to a further rise in the unemployment rate and an even greater contraction in consumer demand. In Germany, the unemployment rate remains unchanged. But in Spain, the number of unemployed increased by another 44.4 thousand.

So, here's the most realistic scenario: Europe will return to deflation, which is worse than in the second half of last year, after the temporary price growth. In this regard, the pan-European data on retail sales, which are published on Thursday, acquire an extremely high value.

Retail Sales (Germany):

Although the final data on business activity indices are published today, the most important event will be the publication of the producer price index in the euro area. The rate of decline in producer prices is predicted to slow down from -1.1% to -0.3%. Here, it is necessary to remember that producer prices are a leading indicator for consumer prices. This means that if producer prices rise, then inflation will rise after them. In general, the slowdown in the decline in producer prices will be perceived as a very positive factor, while the fall in consumer demand will be thought about later.

It should be also recalled that the final data on the business activity index in the manufacturing sector last Monday turned out to be better than the preliminary estimate, so we should expect a similar development. The same preliminary estimate showed a decline in the business activity index in the service sector from 45.4 to 44.7 and an increase in the composite index from 47.8 to 48.1. Given that the manufacturing index has grown significantly more, even if the index in the service sector coincides with forecasts, the composite index will still grow more than expected. This will boost the strength of the Euro. However, we must bear in mind that things in the European economy are far from ideal. In particular, the final data on Italian GDP for the fourth quarter is expected to show growth in the rate of economic decline from -5.0% to -6.6%.

Producer Price Index (Europe):

On the other hand, the UK business activity indices is expected to show impressive growth. Considering the preliminary assessment, the business activity index in the service sector should rise from 39.5 to 49.7, while the composite index should also increase from 41.2 to 49.8.

As for the euro area, the UK Manufacturing PMI slightly surged more than expected. Thus, the composite index may also rise above the 50-point mark, which separates stagnation from economic growth. If the forecasts coincide, this will have a positive effect on the pound.

Composite PMI (UK):

However, the US dollar will most likely start recovering all its losses once the US session opens. In fact, the United States is also expecting business activity indices to grow. In particular, the service sector should rise from 58.3 to 58.9, while composite index may also do so from 58.7 to 58.8. It can be recalled that the business activity index in the manufacturing sector turned out to be better than forecasted and thus, we expect these data to be the same. Most importantly, employment data is expected to rise by 155 thousand.

On Friday, the US Department of Labor report will be published. The employment growth should indicate an improvement in the labor market.

Employment Change (United States):

In general, the Euro currency is expected to slowly rise before the opening of the US session, after which the quotes will return to their current values.