Weak EUR and sanctions against China

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Market Watch review. 24.03.2021

In today's release, we’ll cover the following topics:

  • Geopolitical conflict with China. 
  • Slowdown in economic growth in Europe. 
  • Weak pound sterling. 
  • Business activity index block for European countries. 

Let's start today's release with a fairly high-profile geopolitical conflict. The United States and Canada followed the EU and the UK in imposing sanctions on Chinese officials over Xinjiang. According to British Foreign Secretary Dominic Raab, the treatment of Uighurs is the most widespread detention of an ethnic and religious group since the World War II. Financial markets have already responded to this with a noticeable decrease in interest in risk, as well as a clear sell-off of the Australian and New Zealand dollars.

On Tuesday, the NZD/USD (New Zealand dollar/US dollar) currency pair fell by more than 130 points, given that the average daily trading volatility is 75 points. A fairly strong reaction from traders indicates the importance of this event. Let me remind you that New Zealand and Australia, whose currencies have suffered the most, are the main suppliers of raw materials for China, which means that the economic downturn is negative for the currencies of these countries.

And now let's move on to European currencies. The gap between economic growth in the US and Europe continues to widen, which may have negative long-term consequences for the EUR (euro). Against this background, economists from the investment bank Barclays predict a decline in the quotes of the EUR/USD (euro/dollar) currency pair to 1.1400 by the end of this year, thereby confirming the trend change from an upward to a downward one.

The situation is very similar in the GBP/USD (pound/dollar) currency pair. The activity of buyers is decreasing, which is largely due to the decline in optimism about the effectiveness of vaccination in the foggy Albion. Let me remind you that earlier one of the key drivers of growth for this currency pair was the news about a fairly high rate of vaccination in Britain. But as we can already see, London is not able to significantly ease quarantine restrictions and return the service sector to normal operation. As a result, the risk of a trend change remains very high, especially against the background of a decrease in interest in risk.

And in conclusion, I will note the upcoming publication of a block of business activity indices for the services and manufacturing sectors of all European countries. If the situation in the manufacturing sector of most EU countries remains quite good, the service sector is still in a very bad state. Let me remind you that the service sector provides more than 70% of the GDP of developed countries. Therefore, only unexpectedly strong growth in business activity in services can support the euro. But there are no prerequisites for this yet.

Closely monitor the news background and be prepared for all the surprises of the market.

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