Eurozone
The euro continues to be a favorite in a pair with the dollar, relying on a steady growth in industrial production and the recovery of the labor market. While the US Congress is preparing to implement a package of sanctions against European firms, skillfully disguised as anti-Russian, European business reports on the growth of business activity.
According to IHS Markit, the index of business activity in the manufacturing sector in July was 56.6 p, which is slightly below the level of June, but still in the region of five-year highs. Industrial production is expected to grow at about 4% per year, and GDP growth in Q3 should exceed that of Q2.
Despite the fact that the euro looks locally overbought, there is practically no reason to expect a trend reversal in favor of the dollar. The eurozone economy looks confident, while political risks in the US have risen sharply. The US Congress, according to some estimates, committed an anti-constitutional action by forcing Trump to sign a new sanctions bill. The likelihood of a quick resolution of the issue on the ceiling of the national debt is significantly reduced, same as Trump's chances of persuading lawmakers to change healthcare legislation. Investors rightly fear that the progress of the tax reform will drag on against the background of a fall in budget revenues, which could provoke a large-scale decline in the stock markets.
Bulls on the dollar need a strong unexpected driving factor, but the likelihood of its appearance in the current conditions is low. The euro will continue to grow, with a target of 1.21 in the medium term.
United Kingdom
Today the Bank of England will hold its monetary policy meeting, which will be accompanied by the publication of the quarterly report on inflation and the press conference of Mark Carney.
Investors are waiting for the result of the meeting unafraid. It is assumed that the interest rate will remain unchanged at 0.25%, while the main macroeconomic forecasts will be revised slightly downward. The Bank of England will have to admit that inflation after Brexit was higher than expected, and GDP growth slowed. The average wage growth remain low, which ultimately affects both the growth rates of consumer lending and the general purchasing power of the population.
The distribution of votes of the Committee members regarding the rates is of interest. Voting with a result of 6/2 will be regarded by the market as a dovish signal, and the pound may react with a decline. The result of 5/3 will promote the growth of bullish sentiment.
In general, the pound looks confident, taking advantage of the weakness of the dollar and the growth of political risks in the US, and is able to update the maximum at the end of the day, reaching 1.3350/1.3400.
Oil and ruble
The report on commercial oil reserves in the US from the API, published on Wednesday, was of a moderately bearish nature and contributed to some decline in prices. Oil reserves for the reported week decreased by 1.5 million barrels, which turned out to be less than expected. Production slightly increased, while the volume of strategic reserves did not change. The market took the publication of the report calmly and used it for technical correction, as it did not perceive any strong driver.
On August 7 in Abu Dhabi a meeting of OPEC+ will begin, in which the implementation of obligations by the involved parties to the agreement will be considered. Low compliance rate hinders the results of the agreement, as some manufacturers have secretly increased production in June, which as a result reduces the impact of OPEC + on prices. Oil does not yet have a sustainable driver for growth.
The Russian ruble did not react to the signing by the US president of a new sanction law. Despite the growing risks for non-resident companies investing primarily in the oil and gas sector, capital outflows from Russian markets are not observed. The majority will will depend on how the sanctions will be implemented in practice, as well as in the stance of the European countries that may suffer almost more from the new US initiatives. At the moment, the Russian currency has no reason to leave the range of about 60 rubles/dollar.
The material has been provided by InstaForex Company - www.instaforex.com