EUR/USD and GBP/USD. Christine Lagarde: the eurozone economy will lose 8 to 12% of the crisis caused by the coronavirus pandemic

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4-hour timeframe

Average volatility over the past five days: 73p (average).

The EUR/USD currency pair intended to resume the downward movement in accordance with the technical picture on Wednesday, May 27. But this picture assumed a downward movement to the lower boundary of the side channel of 1.0750-1.1000 after traders made another unsuccessful attempt to overcome the upper boundary of this channel. However, quite unexpectedly, the pair soared in the European trading session. At the moment, it is still impossible to say that the current technical picture is broken. Everything that happened today is just another development of the upper boundary of the side channel. At the time of writing, the peak of the day was the 1.1031 level. Thus, the current development of the $1.10 level area can be a classic false breakout. If so, then the downward movement will resume with targets around 1.0750. Traders will be able to start counting on an upward trend if there is a confident and unambiguous overcoming of the 1.0990-1.1008 area. In this case, the bears can surrender and let go of the market.

Only two events were planned that deserve the attention of tradero on the third trading day of the week. We are talking about the speeches of European Central Bank President Christina Lagarde and Vice President Luis de Guindos. Initially, we did not expect Lagarde to say anything extremely important since everything has already been said about the European economy. All forecasts for 2020 are made, the risks for the economy and its approximate recovery time are identified. However, Lagarde managed to discourage the markets, saying that the recession of the eurozone economy in 2020 is likely to be from 8% to 12%. Earlier, Lagarde notes, a slower economic slowdown was projected. Thus, it is expected that at the next meeting, a decision will be made on additional measures to stimulate the economy and the expansion of existing programs of quantitative easing and assistance. Lagarde said during a video conference that the previous forecast of -5% of GDP in 2020 is already outdated, and the overall damage to the economy from the coronavirus pandemic is much higher than originally planned. Lagarde also noted that the overall scale of the economic decline directly depends on how quickly countries cancel quarantine, and the economy begins to work in the usual mode. Tourism-dependent countries are expected to suffer the most from quarantine and the COVID 2019 epidemic. At the next ECB meeting, new inflation forecasts for 2020–2021 will be published, as well as new GDP forecasts for the same years. The head of the ECB also said that she did not expect a new debt crisis in the European Union, since, in her opinion, “the EU countries have made the right decision by increasing their own debts in order to counter the epidemic and these debts will be manageable.” Thus, there is no longer any talk of any soft scenario for overcoming the crisis in the European Union. Recall that earlier the European regulator considered three possible scenarios of the economy in 2020. The “soft” envisaged a 5% drop in the economy, “medium” – by 8%, “hard” – by 12%. It only remains to hope that there will not be a second wave of the epidemic, and the currency bloc will really end the year according to a “hard” scenario, and not according to a “very hard” one.

Therefore, the euro’s growth directly contradicted the essence of Lagarde’s statements, which gives us another reason to conclude that most of the macroeconomic statistics and news continues to be ignored by traders. The fact that the euro continues to rise in price can be caused solely by technical factors, or maybe by a common fundamental background. Indeed, not only small traders are present on the market. Moreover, 80-90% of the markets are just big players. Thus, if these players consider that a cold war between China and the United States is really possible in the coming years, or if they possess information that is inaccessible to the media and ordinary citizens, they can simply begin to get rid of the US dollar. This is a hypothesis, one of the possible options. So far, the pair remains within the side channel and there is no reason or cause for concern.

4-hour timeframe

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Average volatility over the past five days: 85p (average).

The GBP/USD pair was trading in the opposite direction on May 27. If the euro found reasons and grounds for strengthening, then the British pound logically dropped following a nearly eight-day growth. We talked about this in the morning reviews. Despite the fact that the trend for the pair seems to have formed an upward trend, nevertheless, the general fundamental background remains clearly not on the side of the pound sterling. Thus, we believe that quotes of this currency is more likely to resume falling.

Recently, it is with the British currency that the greatest number of traders’ concerns is associated. In addition to the undying themes of Brexit and negotiations with the EU, the issue of further stimulating the British economy, which, like the EU economy, could lose much more due to the pandemic crisis than was originally planned, is very acute. Bank of England Chairman Andrew Bailey has already hinted that the regulator may resort to measures of negative rates and is now just studying the experience of countries and central banks that have already lowered rates below zero. Moreover, it is also expected to expand the program of redemption of assets from the open market in order to flood the economy with even greater amounts of liquidity.

The other day, the markets received information that Brussels was allegedly ready to make certain concessions in negotiations with London, but this information was not confirmed by anything and it is not at all clear where it came from. London’s position in the negotiations generally raises a lot of questions. If Britain does not need an agreement with the EU, then why spend time on it at all? If Boris Johnson is bluffing, showing once again that he is ready to break all ties with the EU, then he already performed this maneuver when he wanted to implement a “hard” Brexit. It seems that the British prime minister is simply playing in public, showing the British people that London is trying to conclude an agreement, but nothing comes of it. After all, a disadvantageous agreement does not suit London. And the EU does not agree to be profitable. Thus, we conclude that the negotiations are at an impasse, and all other information is not true. This means that there are no reasons to be happy about the British currency either.

Recommendations for EUR/USD:

For short positions:

The EUR/USD pair continues its upward movement within the side channel on the 4-hour timeframe. We still expect a downward turn near the upper border of the channel, but we recommend waiting at least for the MACD indicator to turn down, and according to the Ichimoku indicator, we do not recommend trading at a lower price before crossing the Kijun-sen line.

For long positions:

Buy orders can be opened no earlier than overcoming the area of 1.0990-1.1008. It is after overcoming this obstacle that we can expect an upward trend to form and begin a new trade to increase.

For short positions:

The EUR/USD pair continues its upward movement within the side channel on the 4-hour timeframe. We still expect a downward turn near the upper border of the channel, but we recommend waiting at least for the MACD indicator to turn down, and according to the Ichimoku indicator, we do not recommend trading at a lower price before crossing the Kijun-sen line.

For long positions:

Buy orders can be opened no earlier than overcoming the area of 1.0990-1.1008. After overcoming this obstacle, we can expect an upward trend to form and begin a new trade to increase.

The material has been provided by InstaForex Company – www.instaforex.com