EUR/USD and GBP/USD: The pound may strengthen amid prospects of a trade agreement between the UK and the EU. Trade cautiously

The euro and the pound continue to rally against the US dollar amid strong prospects of economic recovery. The gradual recovery of economic activity in many countries pulled the risky assets back up. Today, the data on business activity in the service sector will be published, which may provoke a further increase in the rates of the euro and the pound. Meanwhile, the ongoing riots and mass protests, which started after the death of African-American George Floyd at the hands of the police, are adding pressure on the US dollar.

The US Department of Defense has decided to deploy about 1.6 thousand troops in the vicinity of Washington to restore order in the city, as citizens continue to ignore the officially imposed curfew. However, the guards are still at the military bases in the capital region, and their presence in Washington has not been noticed. Nevertheless, if the civilian authorities fail to take control of the situation in the near future, another wave of troops may be deployed, which could provoke another wave of unrest in the city.

In another note, the macroeconomic reports published yesterday were quite weak, but did not take strong hold of the markets. According to the data published by the Retail Economist and Goldman Sachs, retail sales in the US dropped by 3.1% in the week of May 24 to May 30, and fell by 15.1% compared with the same period last year. The Redbook, on the other hand, reports the US retail sales falling by only 1.4% for the first 4 weeks of May, but dropping by 7.5% per annum. It also decreased by 7.2% for the week of May 24-30, compared with the same period in 2019.

The only positive news yesterday was the rising business activity in the area of the New York Fed, which upped by 15.2 points in May, according to the report of ISM, and completed to 19.5 points, much better than the low figure of 4.3 points recorded in April. Although a value below 50 still indicates a slowdown, the recovering business activity has improved the expectations and economic outlook for the next 6 months.

In the eurozone, although the euro keeps on rallying against the dollar amid strong macroeconomic reports in the composite index and services sector, trading cautiously is the best option, since a meeting by the ECB will be held tomorrow, which may present darker-than- expected economic forecasts.

Nevertheless, the euro’s rise is attributed to the proposed € 750 billion assistance measure for economic recovery from the pandemic crises, which will require rather difficult and compromise decisions, primarily with the northern EU countries, with which there are now deepest disagreements. According to reports, approximately 40% of the amount can be used to save the economies of Italy and Spain, which can lead to quite serious questions about the size of the shares of grants and loans. The Netherlands, Denmark, Austria and Sweden, the same four countries which opposed the Franco-German plan, also disagreed with the new measure. The approval of it threatens the political alliance between the EU countries, since the taxpayers are the ones who will be burdened into paying-off the debts that will be taken.

Exchange Rates 03.06.2020 analysis

The World Bank also published a report yesterday, saying that low-income economies will remain badly damaged for five years after the onset of the coronavirus pandemic, as they have higher risks of a low growth potential in the near future. Although the report is quite negative, the markets remain unaffected, since everyone already foresaw such conditions.

As for the technical picture of the EUR / USD pair, bulls will attempt to break above the 12th figure, in which a breakout from the resistance level 1.1230 will lead to a strong upward movement to the highs of 1.1295 and 1.1350. However, if today’s reports lower the demand for the euro, traders may start taking profits ahead of the ECB meeting tomorrow, and the first major support levels will be seen in the areas 1.1140 and 1.1070.

GBP / USD

The British pound has been rallying against the US dollar as well. Possible trade agreements between the UK and the EU renewed the bullish mood in the market, disregarding the effects of the failed negotiations previously. Rumors are floating that the UK is now ready to make concessions with the EU under a trade agreement.

Exchange Rates 03.06.2020 analysis

Last month, discussions arose that the EU is willing to abandon tough approach to the fishery problems with the UK. If the upcoming negotiations finally agree to compromise and meet halfway, that is, if the UK agrees in the fisheries and trade rules of the EU, the EU may reduce its tough approach to the UK. Both countries must also make a decision before July 1 on the extension of the Brexit transition period, which ends at the end of this year.

Meanwhile, the weak data on UK mortgages did not affect the dynamics of the pound, despite the fact that in the second half of this year, the indicator is unlikely to return to pre-crisis levels. According to the report, approved mortgages in the UK dropped to 15,848 in April, so much lower than the 56,136 record in March. Limiting lending due to a sharp increase in unemployment amid the coronavirus pandemic, despite low interest rates, is the main reason for the observed decline. Mortgage lending is expected to be 10% below the pre-crisis high in the second half of this year.

As for the technical picture of the GBP/USD pair, bullish mood remains, and a breakout from the resistance level of 1.2610 will lead to a stronger upward trend in the area of the highs 1.2650 and 1.2740. As for the downward correction, large support levels can be seen around 1.2505 and 1.2430.

Source: EUR/USD and GBP/USD: The pound may strengthen amid prospects of a trade agreement between the UK and the EU. Trade cautiously

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