The euro and the pound continues to sharply drop. And if with the pound, everything is relatively clear, since it is still under pressure from weak macroeconomic data, aside from being overbought, then with the euro, everything is not so simple. From a fundamental point of view, Europe's statistics yesterday were all positive.
In particular, we are talking about the final data on the business activity index in the manufacturing sector, which turned out to be significantly better than the preliminary estimates. In the whole euro area, it rose from 54.8 to 57.9, against the preliminary estimate of 57.7. At the same time, there was growth in all major European countries. In Spain, the index rose from 49.3 to 52.9 against the forecast of 51.5. In Italy, it also did by 56.9 instead of rising from 55.1 to 56.2. It was then followed by France, whose index rose by 56.1, against the forecasted growth from 51.6 to 55.0. Lastly, in Germany, the manufacturing index rose from 57.1 to 60.7, which is slightly better than the forecasted 60.6.
Moreover, the preliminary inflation data in Germany and Italy also turned out to be significantly better than forecasted, contrary to the recent data on France and Spain. In particular, Italy's inflation rose from 0.4% to 0.6%, while Germany also did from 1.0% to 1.3%. It is noteworthy that inflation in Italy is only expected to rise up to 0.5%, and in Germany, they expected the growth rate of consumer prices to remain unchanged. This clear growth in inflation in the largest economy of the euro area inspires optimism that inflation in the entire eurozone will at least not decline. In general, the European macroeconomic statistics are clearly encouraging, but the Euro currency continued to decline. Although it is fair to say that the inflation data in Germany stopped the euro's weakening. This process resumed with the opening of the Asian session.
Inflation (Germany):
The UK's business activity index in the manufacturing sector also turned out to be slightly better than the preliminary estimate, which rose to 55.1, against the forecasted growth of 54.1 to 54.9. However, the lending market data clearly indicated that things are extremely bad in the British economy. The total volume of consumer lending declined by 2.4 billion pounds, which has been doing so for five consecutive months. At the same time, the contraction in consumer lending will inevitably lead to a fall in consumer activity, which will slowdown the economic recovery. This may eventually result in deepening of the economic downturn. Thus, the pound's weakening is quite justified.
Consumer lending (UK):
In the US, the business activity index in the manufacturing sector was also published, where the final data also turned out to be better than forecasted. However, in this case, we are not talking about growth, but about decline. According to preliminary estimates, the index was expected to fall from 59.2 to 58.5, but the actual decline was 58.6. It is fair to note that the index dropped from the maximum value for the past ten years, and it still remains in the area of maximums. Therefore, the result is quite well.
Manufacturing PMI (United States):
Today's main event will be the publication of preliminary inflation data in the euro area, which is expected to rise from 0.9% to 1.0%. However, Germany's inflation growth leaves little doubt that this will be the case. If inflation rises in Europe, one can expect that the ECB will begin to think about slightly adjusting the monetary policy in the form of tightening. Theoretically, this is an excellent reason to strengthen the Euro currency.
However, we should pay attention to the retail sales data in Germany published in the morning. Their growth rates by 1.5% were replaced by a decline of -8.7%. In other words, the rise in consumer prices sharply led to a disastrous decline in consumer activity. This suggests that the inflationary processes in Europe are not sustainable. It is quite possible to assume that inflation will soon be replaced by a much deeper deflation than a couple of months ago. It should be recalled that Europe's retail sales data will be published on Thursday. It turns out that everything is still proceeding, even if not according to the worst-case scenario, which implied a sharp inflation surge and an uncontrolled spiral of price growth. In general, there are growing risks of another deflation every day.
Inflation (Europe):
The EUR/USD pair reached the area of the psychological level of 1.2000 during the inertial decline, where the volume of short positions declined again. A slowdown may occur in case of a repetition of the past natural basis, which may eventually lead to a price rebound towards the level of 1.2100.
An alternative scenario will be considered if the price holds below the 1.1980 mark in the H4 chart, which may result in the prolongation of the January correction.
The GBP/USD pair continues to follow the correction path from the high (1.4224) of the mid-term trend, where market participants have already managed to update the last week's low. If the price is kept below the level of 1.3850, the pound may further decline towards 1.3750.
