Trading dollar pairs is not recommended today, until the Fed's chief, J. Powell, said his speech, which should take place as the US session starts. Regardless of what price dynamics that a pair paired with the US dollar have, everything may still change at night. According to most analysts, J. Powell will exert strong pressure on the dollar, detailing Central Bank's new strategy. Given such possible prospects, traders began selling the US currency in advance – the dollar index showed a downward trend again, reflecting the corresponding trends. However, too high market expectations can let traders down, especially those who hope that the dollar will further decline. If Powell limits himself to generalities and does not implement the most pessimistic expectations, the dollar will rise again very quickly. In view of this uncertainty, it is better to bypass dollar pairs today, unless, of course, we consider trading as a lottery.
Nevertheless, we can carefully look at some of the cross-pairs. In my opinion, the euro/pound pair is particularly interesting, which has been showing strong downward impulse for two days. For this week, the pound shows quite contradictory dynamics on the contrast of news drivers.
So, on Monday, an information was published that Britain's Prime Minister, Boris Johnson, may leave his post in six months due to health problems after suffering from coronavirus. According to the counterpart of the publication from Johnson's side, the head of government is still suffering from the consequences of COVID-19, which he got over in the spring. Amid such reports, the pound collapsed across the market, as the prospects for political uncertainty during the difficult negotiations between London and Brussels do not sound good for traders. On the other hand, the EUR/GBP cross-pair jumped to a local high of 0.9043, indicating the seriousness of the situation. In addition, the pair's growth was driven by good reports from the IFO. Germany's business sentiment index showed positive dynamics, being better than the forecast values. This fact strengthened the bullish mood among eur/gbp traders, and the pair tested the 90th figure.
Johnson officially rebuttal, literally the day after publication in the Times. He said that the information is absolute nonsense. At the same time, he noted that he felt even better than before the coronavirus, as he had lost 9 kilograms.
This is how the news feed was created unexpectedly, which at first, allowed the cross-pair to rise by almost 100 points, and then down by 120 points, to the middle of the 89th figure. Currently, the pair is testing the key support level of 0.8950. This is the lower line of the Bollinger Bands indicator, which coincides on the daily chart with the lower border of the Kumo cloud. If the bears overcome this target, they will open their way to three-month lows, which are at the base of the 88th figure (the upper border of the Kumo cloud, only now on the weekly chart).
However, it is unlikely that the sellers will break through the above-mentioned support level due to different reasons. First, the downward impulse for the pair has disappeared and second, a stronger informational reason is necessary for the downward trend to develop.
Moreover, the markets are highly concerned about the prospects for the recovery of the pound, particularly with the curtailment of the state wage subsidy program in connection with the pandemic. A survey published recently by the Confederation of British industry reflected very "unhealthy" trends. According to their data, employment in retail trade declined at the fastest pace in the past 11 years – the last time such dynamics were observed was in the winter of 2009. According to some experts, the British government's refusal to extend the above-mentioned state program will significantly slow down the country's economic recovery. Moreover, we will see the negative consequences of this decision in the near future, when data on the British labor market for August will be published.
Brexit is also one of the factors against the pound. The last round of negotiations between London and Brussels ended in failure: the parties could not find a compromise on any of the disputed points. The heads of the negotiating delegations accused each other again of being "non-negotiable" and counterproductive. Meanwhile, the "deadline" is gradually approaching, as the British side categorically refuses to extend the terms of the transition period.
Everything suggests that the current decline in the cross-pair is temporary. Tomorrow's speech by the head of the Bank of England, Andrew Bailey, may weaken buyers' position. Therefore, the downward impulse can be used as a reason to open longs with the first medium-term goal at 0.9010 (the average line of the Bollinger Bands indicator on the daily chart). A more difficult goal is 0.9060 (the upper limit of the Kumo cloud on the same time frame).
