FX.co ★ Europe to face another economic lockdown. Strong Nonfarm Payroll Report will strengthen US Dollar against Euro and Pound

The euro and the pound sterling continued their gradual recovery against the US dollar after strong data on manufacturing activity in the eurozone and the UK. However, the situation is clouded by the increase in the number of Covid-19 infections in the eurozone. Given that we have Easter and Good Friday ahead, the situation with the spread of coronavirus may only worsen, which will slow down the recovery of the European economy by this summer.

Covid-19 and new problems

German Chancellor Angela Merkel once again called on citizens yesterday to ease the burden on nurses and doctors caring for the rapidly growing number of COVID-19 patients. Given that her plan to isolate and introduce quarantine restrictions during the Easter holidays has failed under public pressure, all that remains is calls for an adequate response to the situation. The Germans should listen to Merkel since according to the latest data from the disease control agency, 24,300 new confirmed cases of coronavirus infection were recorded in Germany per day. The head of the Robert Koch Institute has warned that the country is seeing a third spike in infections, caused by more infectious strains of the virus.

Meanwhile, the director of the World Health Organization's Europe office has raised concerns about the immunization campaign against COVID-19. In his opinion, they are very slow, which jeopardizes all efforts to stop the pandemic. As proof, he cited the fact that, to date, only 10% of the European population received one dose and that only 4% were fully protected by two doses. "As long as coverage remains low, we need to apply the same social protection and distancing measures that were in place before the vaccine was available," Kluge said.

Immediately after that, good news came from the company Pfizer, which said that their COVID-19 vaccine remains effective even six months after it was administered. These results are presented in the new results of the study, which involved more than 44,000 volunteers. The company said the vaccine is 91% effective against symptomatic diseases and reliably protects against the more severe effects of COVID-19.

Production activity

As I have noted above, yesterday's fundamental indicators led to a strengthening of risky assets against the US dollar. According to Destatis, retail sales in Germany rose 1.2% in February this year, after a sharp 6.5% drop in January. Economists had forecast sales to grow at a faster pace of 2%. The growth was interrupted by a three-month drop in the indicator. On an annualized basis, retail sales were down 9%.

But the data on activity in the manufacturing sector of the eurozone countries still provided larger support for the European currency. According to IHS Markit, the latest purchasing managers index (PMI) jumped to 62.5 points in March from 57.9 points in February. The indicator is above the level of 50.0 points, which indicates an increase in activity. The growth was driven by record production and new orders. Export orders also increased. This is especially important for the German economy, where the manufacturing PMI rose to a historic high of 66.6 points. France's latest manufacturing PMI rose to 59.3 points, while the similar Italian index rose to 59.8 points.

Yesterday, the day before the publication of the monthly report on US nonfarm employment, data from the US Department of Labor on initial applications for unemployment benefits were released. In the week to March 27, the number of initial jobless claims rose to 719,000, up 61,000 from the previous week's level of 658,000. Economists had expected the number of jobless claims to fall to 680,000. However, it is unlikely that this report seriously dampened the mood of traders, as data from ADP came out on Wednesday, where it was indicated that employment in the US private sector increased by 517,000 jobs in March after rising by 176,000 jobs in February. Economists had expected the figure to be even higher, at 550,000. Today, the Department of Labor will release a monthly report on employment in the non-agricultural sector and the unemployment rate. The unemployment rate is forecast to fall to 6.0% in March from 6.2% in February, and the number of people employed is expected to increase by 633,000.

Another report from the Institute for Supply Management (ISM) yesterday showed that the manufacturing PMI in the US also rose quite strongly amid the economic recovery. According to the data: the index jumped to 64.7 points in March from 60.8 points in February, while economists had expected the index to rise to 61.3 points. The chairman of the ISM Manufacturing Business Survey Committee noted that companies and suppliers continue to struggle to meet rather weak demand, which lags far behind the levels seen before the outbreak of the coronavirus pandemic. Problems are seen in lead times, which are very often delayed by widespread shortages of critical components and materials, leading to higher commodity prices and supply chain difficulties.

As for the technical picture of the EUR/USD pair, the bulls continue to bend their line, focusing on the new major resistance. The only problem is that today, the EU countries are observing Good Friday and many markets are closed. In this regard, volatility promises to be extremely low. Buyers' problems could start in the area of major resistance at the bottom of the 18th figure, a breakout of which would lead to a larger upward correction to the highs of 1.1840 and 1.1890. It will be possible to talk about the return of pressure on risky assets after the bears achieve a breakout of the support at 1.1755, which will lead to a rapid movement of the euro down to the 1.1710 mark.

GBP

The British pound is prone to growth, although today promises quite a lot of obstacles due to the low volume of turgor and important fundamental data on the US labor market, which may strengthen the dollar.

It will be possible to talk about the continued growth of the GBP/USD pair only after the bulls manage to overcome the resistance of 1.3860. A break of this range will open a direct path to the highs of 1.3920 and 1.3960. If we observe a decline in the pair after the release of the report on the unemployment rate in the US, then the active actions of the bulls will be recorded in the support area of 1.3805. A breakout of this range will quickly increase pressure on the pound, pushing the trading instrument to the low of 1.3760. This will jeopardize the entire ascending channel that formed on March 30th.

If we talk about yesterday's growth in the pound sterling, it was directly related to the excellent report from IHS Markit and the Chartered Institute of Procurement & Supply. According to the data: activity in the UK manufacturing sector in March rose to a ten-year high of 58.9 points. The most active growth was observed in the manufacturing industry, which was due to an increase in the volume of new orders. Many companies reported improved demand from local and overseas customers.