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04.08.202110:08 Forex Analysis & Reviews: Delta strain threatens upside potential for euro and pound

Euro tried to bounce up on Tuesday, however, volatility remained at an extremely low level because investors are becoming increasingly worried over the rapid spread of the COVID-19 delta strain. Many central banks have already acknowledged the need to maintain a super-soft monetary policy in order to combat this restraining factor.

In fact, recent reports show that economic recovery is slowing down, which proves that the approach of the Federal Reserve and European Central Bank is correct. The Fed repeatedly stressed that it will maintain the current volume of bond purchases until significant progress is made towards employment and inflation.

Going back to the coronavirus, a strong surge in cases was recorded in the United States in recent weeks, with the seven-day moving average hitting 72,790. This happened even though around 70% of the population had received at least one dose of vaccine.

Exchange Rates 04.08.2021 analysis

The situation in other countries is also bad, leading to another downturn in tourism. China, for example, rushed to close tourist sites and cancel cultural events and flights, as the outbreak spread to almost half of China's provinces in just two weeks. Authorities advised residents to refrain from travel unless absolutely necessary.

Accordingly, public spending is restricted once again, thereby affecting economic growth in the second half of this year. Nomura Holdings has already lowered its GDP forecast for the third quarter, from 6.4% to 5.1%. For the fourth quarter, they project GDP to grow by only 4.4%.

With regards to China's GDP, Nomura said it will increase by only 8.2%, as the latest outbreak already led to the closure of all tourist sites from Zhangjiajie to Hunan, Jiangsu and Shanxi provinces. It will also affect retail sales, real estate investment and infrastructure investment.

Exchange Rates 04.08.2021 analysis

As for the United States, one of the biggest dilemmas President Joe Biden is facing is the appointment of the next chairman of the Federal Reserve. To play it safe, he could give the position to Jerome Powell again. But to appeal to progressive Democrats, his ideal choice is Lael Brainard, who is more attentive to his economic agenda and has a much tougher view on banking regulation.

Powell's term ends in February 2022, and the most fierce discussion on this issue will most likely unfold in September.

Exchange Rates 04.08.2021 analysis

On the subject of macro statistics, Eurostat reported on Tuesday that PPI in the Euro area rose 10.2% year-on-year, thanks to energy prices. The data said there was a massive 25.4% y/y increase in energy prices and a 2.3% growth in consumer durables. As for core PPI, which excludes energy prices, there was a 4.9% jump in June. And in terms of month-over-month, PPI rose 1.4%, which is in line with the forecast.

In the US, there was a surge in orders for non-durable goods, which led to an increase in new orders for manufactured goods. The report said the data indicated a 2.1% and 0.9% growth respectively, which pushed overall production orders up by 1.5%.

All this dealt a significant impact to EUR/USD, but today there may be surprising movements in the market, as bullish traders have shifted their focus around 1.1885. Pushing the pair above this level will provoke a larger jump towards 1.1910, 1.1940 and 1.1985, while failing to do so will lead to another p;unge towards 1.1855, 1.1835 and 1.1800.

GBP

Pound traded in a horizontal channel amid continued optimism over declining COVID-19 cases in the UK. Latest records show that there were about 22,000 new cases earlier this week, but the 7-day moving average is 27% lower than the previous week. But even if restrictions are now completely lifted, authorities still advised citizens to return to work in offices gradually.

With regards to the monetary policy, the Bank of England will talk about the issue this coming Thursday, but it is likely that they will not make obvious changes. The infectious delta strain threatens short-term labor market outlooks, so it is not really ideal for the central bank to tighten its policy.

Today, a lot depends on 1.3885 because pushing GBP/USD above it will most likely provoke a jump towards 1.3935, 1.3980, 1.4020 and 1.4060. But if the pair drops below the level instead, price will plunge to 1.3845 and 1.3800.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Jakub Novak,
Analytical expert of InstaForex
© 2007-2021
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