The Euro continues to trade at this month’s highs, but slightly moved from them. It is not surprising that the European Central Bank is now much less worried about the Euro’s high rate than the growth in bond yields. Yesterday, ECB’s head, Christine Lagarde, said that she carefully monitors the government bond market, without ruling out taking action to prevent rising yields undermining the recovery from the pandemic. Bond yields are rising around the world as investors bet on a coronavirus vaccine that will boost larger global economic growth. In turn, this will lead to a surge in consumer spending and, accordingly, an increase in inflation and interest rates.
Such a scenario not only suggests an increase in investor interest in risk, which will contribute to the economic recovery, but also hurt the recovery period by increasing the cost of financing the huge debt burdens of the public and private sectors that have accumulated on the balance sheets during the coronavirus pandemic. During her last meeting, Ms. Lagarde promised to maintain favorable financing conditions – i.e. zero interest rates until the crisis passes.
The yields declined after Lagarde’s speech, with 30-year German bonds falling by 6 bps., that is, to 0.15%. It was -0.20% at the beginning of the year. However, the subsequent growth resumed. Several economists from large commercial banks agree with the ECB’s position and are also certain that higher long-term profitability poses a greater risk for the ECB than an extremely strong euro. Therefore, Euro currency is no longer in control, which gives opportunity for new highs in the EUR/USD pair.
Eurozone’s growth in bond yields leaves the ECB no choice but to start buying public debt on its own through the emergency purchases program, which is currently being conducted in connection with the pandemic. Based on the latest data, the Central bank is already gradually increasing the volume of bond purchases. Last week, it bought 17.2 billion euros under the current program and this is the maximum since January 15.
Today’s inflation data in Europe did not interest the market, since the expectations already coincided with the forecasts of economists. According to Eurostat data, January’s consumer prices rose for the first time in six months. The EU-standardized CPI increased by 0.9% y/y, after declining by 0.3% last December. A year earlier, inflation was at 1.4%. The data matched economists’ expectations. As for core inflation, excluding energy, food, alcohol and tobacco, inflation accelerated from 0.2% to 1.4%. The consumer prices rose by 0.2%, in line with preliminary estimates.
At the same time, traders did not put much attention on the growth of orders in the Italian industry. A report from statistics bureau Istat said industrial orders rose 1.7% in December, following a 1.4% decline in November. Orders from the domestic market rose 6.5%, while orders from the foreign market fell 4.9% in December.
Technical picture of the EUR/USD pair:
It almost did not change compared to the morning forecast. And although the euro has slightly lost ground, the overall balance remains on the side of the buyers of risky assets, who are one step ahead from continuing the bullish trend. In order to do so, they need to break above the resistance level of 1.2180, which will lead to a new upward wave in the area of the highs: 1.2220 and 1.2260. The Euro currency may decline in the morning, but there is no reason to panic as the next major support level is seen at 1.2135. But even if this area is broken, one can also expect an increase in long positions in the area of 1.2090. A recent COT report showed that long non-profit positions rose 220,943 to 222,895, while short non-profit positions rose from 80,721 to 82,899. As a result, the total non-commercial net position declined slightly after rising last week to 140,006 from 140,222. The weekly closing price was 1.2132 against 1.2052 a week earlier, indicating the presence of buyers in the market.
The pound sterling expectedly ignored UK’s unemployment rate data, which rose to a five-year high in the fourth quarter of 2020. And although the UK authorities are doing everything they can to support the labor market, the COVID-19 situation continues to make its own adjustments, which puts pressure on the market. According to today’s data from the Office for National Statistics, the unemployment rate increased to 5.1%, the highest since 2016. At the same time, the employment rate decreased by 0.3% compared to the previous quarter to 75.0%. The number of people looking for work has increased by 121,000.
Based on a recent interview, the UK Treasury Secretary said he did everything he could to protect jobs during the crisis. He also mentioned that he will set out new measures to support jobs for the remainder of the coronavirus pandemic. The Office for National Statistics noted that there are already the first signs of stabilization of the labor market, which were observed at the end of last year. And while unemployment is expected to continue to slowly rise over the rest of this year, faster GDP growth in the second half of 2021 should prevent a sharp fall in the labor market. According to the latest forecasts, UK’s official unemployment may reach the level of the global financial crisis of 8.4% after the curtailment of measures to support the labor market.
The data also showed that average earnings, including bonuses, grew by 4.7% at the end of 2020, against the expected 4.1%. In January, the number of applications for unemployment benefits fell by 20,000.
Technical picture of the GBP/USD pair:
It is also almost the same with the morning forecast. Bulls will try to protect the support level of 1.4050, from which the pair depends its further direction. If major players did not actively buy, then long positions are suggested to be delayed until yesterday’s low of 1.3983 will be tested. The upward trend will only resume once the resistance level of 1.4110 is broken, which will open up a real prospect for the pair to strengthen in the area of the highs of 1.4185 and 1.4240. As for the COT report, long non-commercial positions only declined to the level of 60, 269 from 60, 513; while the short ones fell from 39, 395 to 38, 102, which maintained the bullish mood in the market. As a result, the non-profit net position increased from 21,118 to 22,167. The weekly closing price was 1.3914 against 1.3745.
The material has been provided by InstaForex Company – www.instaforex.com