This week, markets are focused on the statements made by the world's central banks. No strong fundamental data is published. Therefore, the market reacts strongly to the statements made by the heads of the Fed, the ECB, and the Bank of England.
When testifying before the Senate Banking Committee yesterday, Federal Reserve Chairman Jerome Powell once again gave a relatively moderate outlook for a drop in the unemployment rate. Powell noted that despite strong economic growth this year, the labor market may react with a delay. "We see that the recovery of the labor market continues, and people find work - this is a great result," Jerome Powell said during the online conference. The Fed Chair reminded that in the quarterly forecast published last week the unemployment rate is expected to decline to 4.5% by the end of the year from 6.2% in February. As for the economic outlook, in 2021 the US economy is expected to rise by 6.5% which will be the fastest growth rate since 1983. Powell also mentioned inflation prospects: the consumer price index is expected to reach 2.4% in 2021. However, it should decline to a target level of about 2% next year. In January this year, inflation was around 1.5%. Prices will definitely rise due to the so-called base effect caused by postponed demand and accumulation of funds during the lockdown. The recent support measures introduced by the US government and a $1.9 trillion bill passed by Congress will also drive consumer spending, thus pushing inflation forward.
According to the Treasury Department and the Internal Revenue Service, about 127 million stimulus payments worth around $325 billion have been paid so far. The second package of payments will consist of 37 million checks worth about $83 billion. The payments are made in the form of paper checks and prepaid debit cards that are sent by mail. Individuals who earn less than $75,000 or couples with the income less than $150,000 qualify for benefits of $1,400 for themselves and for each qualifying dependent. If you are a resident of the United States and earn less than $75,000 a year, you can check your status for receiving payments here.
Now let's talk about the recent situation around the lockdown restrictions that Angela Merkel announced earlier this week. A tense video conference with high-ranking officials, which took place on Monday afternoon, was suspended. Angela Merkel said that new measures were needed to contain the next outbreak of coronavirus and proposed a tough five-day lockdown on Easter weekend. Thirty-three hours later, after a harsh public reaction to the proposed isolation, Merkel backed out of the plan. Some analysts point out that the consequences of this decision could negatively affect the future of Europe's largest economy. But let us move away from politics and talk about the prospects of the EUR/USD pair.
After the decision to introduce tough restrictive measures in Germany was canceled, the European currency regained ground against the US dollar and moved upwards. As for the technical picture on EUR/USD, the further direction of the pair will be determined after the pair exits the sideways channel. The breakout of the resistance level at 1.1840 will support the buyers of risk assets. This will accelerate the upward correction of the pair to the area of 1.1890 and 1.1930. The bearish trend may continue only after the price breaks through the low of 1.1804 reached in the Asian session. In this scenario, the euro will rapidly decline to local lows of 1.1760 and 1.1710.
Yesterday, the fundamental data from in the EU and the UK encouraged investors. The private sector in the euro area resumed its growth in March supported by record production growth. The increase in global demand after the lifting of quarantine restrictions will boost economic growth in the future. According to the IHS Markit report, the composite PMI jumped to 52.5 in March from 48.8 in February. Economists predicted that the indicator will reach 49.1 points. Manufacturing activity surged to record levels, while the services sector was again hit by coronavirus-related restrictions. The manufacturing PMI jumped to 62.4 points from 57.9 points in February. The index of business activity in the services sector rose to 48.8 points from 45.7 points. If the indicator drops below 50 points, this means a decrease in activity. IHS Markit noted that despite a sharp jump, the outlook has worsened due to the growing infection rates and a new coronavirus strain. Besides, new lockdown measures were adopted by several European countries last week.
It is not surprising that the largest increase in economic activity was observed in Germany. The growth of Germany's composite PMI accelerated to 56.8 points in March from 51.1 points in February. The indicator exceeded economists' forecasts of 51.6 points. The services PMI has finally passed the level of 50 points and reached 50.8 points compared to 45.7 points in the previous month. This definitely indicates an increase in economic activity. In addition, Manufacturing PMI rose to 66.6 points from 60.7 points.
Meanwhile, the macroeconomic data from the US did not have any strong impact on the foreign exchange market. New durable goods orders decreased in February. According to the US Department of Commerce, durable goods orders fell by 1.1% in February after a sharp rise by 3.5% in January. Economists had expected the indicator to grow by 0.8%. The unexpected drop in durable goods orders was caused by severe winter storms that led to disruptions and affected production.
GBP
In the meantime, the British pound depreciated strongly against the US dollar amid the release of inflation data in the UK. It turned out to be much worse than expected. According to the Office for National Statistics, the annual consumer price index fell to 0.4% from 0.7% in January, while economists had expected the index to rise to 0.8%. On a monthly basis, consumer prices rose by 0.1% after falling by 0.2%. The indicator was expected to jump by 0.5%. Core inflation, excluding energy, food, alcoholic beverages and tobacco, fell to 0.9% in February from 1.4% in January.
The data on the economic activity in the UK offset the weak inflation report and stopped the pound from falling. According to IHS Markit and the Chartered Institute of Procurement & Supply, the composite PMI advanced to 56.6 points from 49.6 points, while economists had predicted a moderate rise to 51.1 points. The services PMI increased to 56.8 points from 49.5 points in February. The manufacturing PMI jumped to 57.9 from 55.1 in February. The prospects of future economic recovery and the improvement in the labor market together with the increase in orders may indicate a further rise in the spring.
From the technical viewpoint, further direction of GBP/USD will depend on the bullish activity at the level of 1.3680. If the bulls manage to protect this level, the pair may then recover to the upper boundary of the 1.3730 channel. A breakout of this level will send the pair higher to the area of 1.3790 and 1.3850. A breakout of support at 1.3680 is likely to lead to a larger sell-off in the pound. In this case, the price will approach the low of 1.3645 and test the lower border at the 36 area.
