The euro remains pressurized due to the escalation of US-China trade relations, the plans of the European Central Bank and the Bundesbank's report. This report is of high importance as it will affect the asset purchase program. All these events are weighning on the single currency. The euro is gradually sliding down after testing the 1.10 level. Besides, the EUR/USD pair is dropping amid a weak risk appetite. Now investors are seeking shelter in the safe-haven assets amid trade tensions between the US and China. The US is also protesting against China's security law. The US believes that this law undermines the national security of Hong Kong. Hence, it became a new stumbling block in the US-China relations.
Economists do not rule out the introduction of new sanctions against China. At the weekend, US National Security Adviser Robert O'Brien provided comments on this matter. The sanctions may be imposed in response to China's national security bill that may destroy the independence of Hong Kong. Hong Kong's autonomy was guaranteed under the "one country, two systems" agreement enshrined in the 1984. However, now this agreement under threat after the National People's Congress that took place on Friday. During the congress, the new national security legislation on Hong Kong was discussed. According to representatives of the NPC, the national security law will not affect the rights and freedoms of residents of the area. However, the US thinks otherwise. Secretary of State Mike Pompeo has already said that any China's decision that affects the autonomy and freedom of Hong Kong will lead to a revision of Washington's relations with China.
As for Friday's report of the European Central Bank and the minutes of the April meeting, it is clear that the majority have agreed on increasing the volume of bond purchases. Changes to the program are likely to be made during the meeting on June 4, 2020. The ECB hopes that such septs will help cushion the economic consequences of the coronavirus. In addition, not long ago, the European Central Bank launched a 750 billion euro emergency bond purchase program. The minutes indicate that most ECB officials are ready to expand the volume of purchases and adjust their structure. At the April meeting, the ECB provided even more stimulus to the banking system.
However, there might be legal consequences to the bond purchase program. This Friday, Bundesbank published a report that showed that such a controversial program is justified and managed to provide the necessary support to the economy, accelerating the pace of GDP growth. Recently, the German Constitutional Court required from the ECB an economic justification for this program and gave it 3 months to provide them or the Bundesbank would withdraw from the program. However, the report indicates that the current asset purchase program, which has already amounted to more than 2.7 trillion euros, has provided significant support to the economies of Germany and France - countries most opposed to the central banks' asset program. Nevertheless, investors are cautious. They are afraid the proposal of the leaders of Germany and France on a one-off 500 billion-euro fund to help the European Union recover from the coronavirus pandemic may not get approval. According to this proposal, the most coronavirus affected member states will be able to get subsidies from the fund. This fund will include all EC countries. Merkel said that "because of the unusual nature of the crisis we are choosing an unusual path."
Judging by the chart, the EUR/USD pair is likely to drop. On Friday, the pair broke the support level at 1.0885. However, it could only increase pressure on the euro and it may sink to the low of 1.0850. Then, it may return to 1.0800. Yet, the bulls still can take the upper hand. If the pair consolidates at Friday's lows, it may test the resistance level of 1.0930. If so, it will attract buyers of risky assets. It will lead to an update of last week's highs around 1.0970 and 1.1010.
GBPUSD
The pound/dollar is under pressure due to the negative economic news. Investors were disappointed by the data on the UK retail sales. The reading showed a sharp decline caused by quarantine restrictions. According to the National Bureau of Statistics, in April, retail sales fell by 18.1% compared to the same period in 2019 after a decline of 5.2% in March. The online sales and home delivery sector was the one that incurred no losses. The indicator rose by 18%. Demand for alcoholic beverages was also high and the score grew by 2.3%. Clothing sales crushed by 50.2%. However, after the easing of self-isolation measures, the indicator will quickly return to its pre-crisis level, although this will deliver a hard blow to economic growth. Economists expect the first uptick in June this year when the economy will gradually recover.
Notably, government borrowing has jumped dramatically amid the increased expenditure triggered by the pandemic spread. In April, public sector borrowing ballooned to £62 billion, which is the highest monthly level of borrowing in history.
The upward movement of the British pound is also halted by the trade negotiations between the EU and the UK. For now, trade talks proceed with no results. The post-Brexit transition period will not be extended beyond December 31, 2020.
On the technical chart, we can see that the GBPUSD pair is moving to the support level at 1.2160. If it breaks this level, it will dip to 1.2120. Later, it may test its low in May located at 1.2070. The bulls may return to the market only after the pair consolidates above the resistance level at 1.2245. It will boost the demand for the pound sterling and lead to the formation of a new bullish wave with a test of the highs at 1.2300 and 1.2370
