06.05.202009:55 Forex Analysis & Reviews: Judicial intervention (review of EUR/USD and GBP/USD on 05/06/2020)

There is some general idea that the state does not have the right to intervene in the economy and somehow influence free competition and the like. And huge masses of people are ready to defend this point of view angrily. However, it is these very people who, as soon as something is wrong with the economy, are the first to run to this very state with the demands of immediate intervention and saving great businessmen from collapse. Although the question itself, frankly, is a bit serious, since politics is a derivative of the economy. Nevertheless, what happened yesterday in the walls of the German Constitutional Court is indeed out of the ordinary. Although this should be attributed to the category of interference of part of the business in the economy or rather, in the activities of the state. The fact, that a group of German businessmen, in alliance with a number of economists, filed a lawsuit with the German Constitutional Court regarding the activities of the European Central Bank, which, in their opinion, is illegal. The essence of the claim is that European legislation prohibits direct financing of the state budget by the Central Bank. According to the plaintiffs, this is precisely what the European Central Bank is doing, directly redeeming government bonds of the euro area countries. And the most surprising thing is that the German Constitutional Court accepted this lawsuit and ordered the European Central Bank to prepare a justification of the legality of these actions within three months. And the piquancy of the situation is that, despite the negative yields on bonds of the euro area countries, they are not able to service their debts. To do this, they have to take new ones. And it is clear that private investors are not eager to buy them, since they will receive less back than they invested. Thus, if a court decision is made that somehow restricts the actions of the European Central Bank to support the euro area countries, most of them will simply go bankrupt at one point. So it is not surprising that this decision was a shock for the market, and the single European currency sharply declined.

At the same time, there is a feeling that even without the decision of the German Constitutional Court, the single European currency should have gone down. To some extent this is true, since the pace of decline in producer prices in Europe accelerated from -1.4% to -2.8%. So the deflationary risks increase every day, and in fact the European Central Bank has no choice but to flood the economy with money in order to somehow accelerate inflation.

Producer Prices (Europe):

Nevertheless, what happened yesterday with the pound is largely indicative of the fact that macroeconomic statistics, at least for one particular day, did not matter at all. Everyone was in a state of shock, but the pound just stood still. Although the index of business activity in the service sector fell from 34.5 to 13.4. The composite business activity index collapsed from 36.0 to 13.8. And of course, we can say that the market was ready for this after the publication of preliminary data that showed approximately the same results. However, the very fact of reaching the next anti-records is not very encouraging. But the drop in car sales by 97.3% was clearly not included in the plans of market participants. Separately, you need to pay attention that this is data in annual terms. That is, the automotive market in the UK has almost ceased to exist at least for now. But there was no reaction.

New Car Sales (UK):

In addition, the market ignored the results of business activity indices in the United States. But the index of business activity in the service sector fell from 39.8 to 26.7, while the composite index fell from 40.9 to 27.0. And these are also new records, with a negative sign. Thus, low indices of business activity have never been. However, in this case, it is entirely possible to refer to the fact that the market was ready for such a development of events, since the data practically did not differ from the preliminary assessment. But other macroeconomic data for the United States were not published. In turn, Donald Trump gave another brilliant idea, from which he had goosebumps. The President of the United States said that the economy urgently needs to be launched on a new one, removing all the restrictions imposed due to the coronavirus epidemic even if people continue to get sick and die. Of course, anyone will be delighted by such a display of humanism.

Composite Business Activity Index (United States):

Today, Europe already reports on business activity indices, and the picture is expected to be no better than in the UK or the United States. Rather, even worse. The index of business activity in the service sector should fall from 26.4 to 11.4. A composite index of business activity may fall from 29.7 to 13.2. And we can only repeat the fact that indexes have never been at such low values. Nevertheless, much more interesting is the data on retail sales for March. The fact is that the growth rate of 3.0% should be replaced by a decline of 8.4%. And although this data is only for March, and not April, they are very eloquent. Indeed, restrictive measures in connection with the epidemic of coronavirus were introduced only in mid-March, and the decline is already very impressive. So the picture may turn out to be disastrous in April, although even the March data should show a record rate of decline at least-for almost a quarter of a century.

Retail Sales (Europe):

The pound has also nothing to be happy about, as the index of business activity in the construction sector may decline from 39.3 to 20.0. This should be the next historical anti-record again.

Construction sector business activity index (UK):

However, you should not think that the dollar will only strengthen. Its growth will most likely be insignificant, and it may even begin to lose ground in the second half of the day. The reason will be ADP employment data, which should show a decline of 20,800 thousand. I will not say that this should be the worst result in the history of such observations. And the worst part is that these data will precede Friday's publication of the report of the United States Department of Labor, the contents of which can finally confirm all the most terrible fears about the nightmare that the US economy is falling into. Especially since, the market began to gradually respond normally to labor market data in the United States at least last week. Apparently, awareness of what is happening gradually comes.

Employment Change from ADP (United States):

It is likely that the single European currency will initially decline in the direction of 1.0775 during the day, after which it will grow in the direction of 1.0900.

The pound is almost in place for a long time. Nevertheless, its attempt to grow towards the level of 1.2500 is quite likely.