24.12.202111:02 Forex Analysis & Reviews: EUR/USD and GBP/USD: Larry Summers Sounds Alarm on Nearing Recession; Euro Buyers Gain Position

The European currency failed to show anything Thursday after approaching a major resistance level around 1.1360 on Wednesday. Strong fundamental statistics on the U.S. economy nevertheless took over risky assets, which pushed the euro below 1.1320, arranging a large sell-off for the trading instrument in the area of the 13th figure – there the bulls again showed their aggression. But before we deal in more detail with the technical picture, let's run through the fundamental component.

Lawrence Summers sounds the alarm

Former Treasury Secretary Lawrence Summers warned about a period of trials for the U.S. economy, in an interview Thursday, threatening it even with the risk of recession in the coming years. Summers noted that the Federal Reserve System was late in identifying the dangers associated with inflation and that delayed measures to reduce pressure could potentially lead the economy to a recession in the coming years.

"If I thought we could sustainably run the economy in a red-hot way, that would be a wonderful thing, but the consequence -- and this is the excruciating lesson we learned in the 1970s -- of an overheating economy is not merely elevated inflation, but constantly rising inflation," Summers said. "That's why my fear is that we are already reaching a point where it will be challenging to reduce inflation without giving rise to recession."

Summers has argued quite a lot lately that the Fed, the Biden administration, and investors underestimate the risk of accelerating inflation caused by the pandemic. He has repeatedly stated that postponing the solution to this problem will require stronger suppression of demand in order to cope with the inflationary jump in prices.

And indeed, the increase in inflation above 6.0% this year, which promises to reach the 7.0% mark by the end of December, forced many to agree with Summers' point of view. Let me remind you that this month the Fed took more aggressive steps towards tightening monetary policy next year. According to the results of the meeting, Fed officials predicted an increase in the interest rate from zero currently to 1.60% at the end of 2023 and to 2.10% in 2024. However, the futures market sees this picture a little differently.

The central bank is still too confident in predicting a sustained low unemployment rate along with a decline in inflation. The average estimate of Fed officials this month for the unemployment rate was 3.5% over the next three years. Many investors are also confident that even as a result of rising borrowing costs in financial markets, growth and inflation will eventually be contained.

Labor market

Since we have touched on the labor market, it is necessary to mention Thursday's report on the number of initial applications for unemployment benefits. The data showed that applications remained at the lowest level in more than half a century, as a strong labor market kept the wave of layoffs at a low level, despite growing concerns about the rapid spread of the omicron strain.

Initial claims for unemployment benefits, for the week ending December 18, remain unchanged at 205,000. The report shows that despite the increase in the number of people being dismissed from work, this is only due to the fact that employers compete for employees by offering better pay and working conditions.

However, economists warn that the spread of the omicron strain in the United States may lead to an increase in layoffs in the coming weeks, especially in the service sector, as consumers adjust travel and entertainment plans to reduce the risk of contracting coronavirus.

Some employers also point out that the situation is still very unstable, and the impact of omicron will become more obvious in the coming weeks. In light of this, the number of initial jobless claims is expected to rise.

Better working conditions and wages do not match Thursday's report, which indicated that consumer spending grew at a slower pace in November. This heightens the risks of a broad economic downturn amid the latest wave of COVID-19 cases.

U.S. consumer spending rose 0.6% last month after rising 1.4% in October, according to the U.S. Department of Commerce. However, this trend is more likely due to the fact that consumers began to prepare for the holidays in advance, making purchases much earlier, due to the risks of shortages of goods. This helped boost spending in October and contributed to a slowdown in sales in November.

The quite expected positive report on the growth of primary home sales in the U.S. also helped the U.S. dollar to strengthen its position against the euro and other risky assets. Due to strong demand and low mortgages, even despite high prices, the growth in new home sales increased, although the October data was revised downward.

New home sales rose 12.4% in November from 744,000 of the previous month, according to the U.S. Department of Commerce. Economists had expected sales to rise 2.8%. New home sales in October were revised down to 662,000 from 745,000.

The median sales price in November rose to $416,900 from $408,700 in October.

And summing up the fundamental statistics, I would like to note the report on German import prices, which in November rose by 24.7% on an annualized basis - the highest rate since October 1974. Energy imports were 159.5% more expensive than in November 2020, according to the German statistical office. This increase was driven by a 270.9% rise in natural gas prices and a 100.4% rise in crude oil prices. Import prices excluding crude oil and petroleum products increased by 20.8%. Export prices in November rose by only 9.9% over the previous year. Compared to the previous month, German import prices rose 3.0% in November, while export prices rose 0.8%.

As for the technical picture of the EURUSD pair

The bulls took a very active position to protect the support at the bottom of the 13th figure, to which the European currency declined Thursday and failed to catch hold of the 1.1330 level. Now risk-takers need to regain control over the level of 1.1330 since, without it, it will not be so easy to expect the December highs to be updated in the near future. Only a consolidation above 1.1330 will open a straight road to 1.1360 and 1.1415. If the bears are brought back under control at 1.1300, we will see a decline in the trading instrument to the area of 1.1260 and 1.1230.

As for the technical picture of the GBPUSD pair

Pound buyers managed to break above the December highs, setting a new resistance level around 1.3435. Now the bulls need to work even harder to get out of this range at the end of the year. The breakout of 1.3435 would open a direct path to the highs at 1.3475 and the 35th figure bottom. Immediate support is seen in the 1.3390 area, a breakdown of which will push the trading instrument to the lows of 1.3345 and then to the bottom of the 33rd figure.