Market participants reinforce expectations of policy easing not only by the Fed, but also by the ECB. Some estimates suggest that currency quotes are predicted to lower interest rates in Europe by 10 basis points this Thursday. Traders make premature conclusions based on the dynamics of debt markets, which may be distorted by the demand for defensive assets. Perhaps this is what is happening now. On the one hand, geopolitical tensions in the Persian Gulf are pressing, and on the other, anxiety around the"hard" Brexit. This scenario is becoming more and more likely, as ardent eurosceptic Boris Johnson is announced today as prime minister of the United Kingdom.
Pro pound
The pound is under increased pressure and it's not just Brexit and Johnson. Representatives of the Bank of England hinted that the regulator could join the "dovish" promise of its Fed and ECB counterparts.
Member of the Board of Directors of the British central bank Michael Saunders openly told Bloomberg about the weakness of the UK economy. Its prospects will worsen the painful Brexit, which the regulator is unable to stop. All this contributes to a further decrease in the pound.
It is worth noting that Saunders' dovish comments were made just before the meeting of the central bank next week. This is a sharp turn in the key of the Bank of England, whose representatives sought to ease market expectations, promising to stick to their "gradual, but limited" increases in interest rates.
In a weak economy, it is difficult for the leadership of the British central bank to go in the opposite direction with colleagues who bombarded the market with announcements about further mitigating policies.
In addition, the United Kingdom quite inopportunely strained relations with Iran.
The British currency paired with the dollar traded near the lowest level for two and a half years. Judging by how things are going, the sterling is firmly established at these levels. However, you shouldn't discount the fact that the pound looks oversold after many months of falling, which means that the pressure on it may turn out to be limited.
About the euro
The euro in conjunction with the dollar fell to monthly lows in the region of 1.1190. The main pair failed to consolidate at 1.12, which had been holding back its weakening since the beginning of June. The decline in yield in European debt markets puts pressure on the euro, while similar expectations regarding the dollar are already fully incorporated in the quotes.
The eurozone is tensely waiting for two events - the results of the vote for the new British prime minister and the European Central Bank meeting on Thursday. The media actively exaggerates that the current head of the ECB, Mario Draghi, decides to make a resignation for the future, announcing the strengthening of economic-stimulating measures. This, of course, will not appeal to the euro.
The breakdown of the level of 1.1194 became a signal for opening a short position on the main pair. If we talk about the long term, then, despite the strong expectations of traders about the growth of the dollar and the decline of the euro, things can go differently. Currency battles between titans such as the Fed, the ECB, the Bank of Japan, and the Bank of China are becoming more and more obvious. It is unlikely that the dollar will remain strong in conditions of a total reduction in interest rates.
The material has been provided by InstaForex Company - www.instaforex.com