Tightening of restrictive measures in Europe caused panic sales. Overview of USD, EUR, GBP

Risky assets fell down yesterday following reports that Germany and France announced to tighten their restrictive measures amid high cases of COVID-19. The German DAX collapsed, after which stock indices in other countries sharply declined. At the same time, commodity currencies are being sold, like oil, together with defensive assets such as the yen and the dollar.

In turn, the yields' dynamics of the world's major bonds was quite restrained. The 10-year UST yield actually closed 1 bps higher than yesterday's levels at 0.7710%, while the 10-year bond yield by the end of the day was down just 1 bps, to -0.625%. UK 10-year bonds fell 2 bps, to 0.2130%, and 10-year Italian BTPS rose 6 bps, to 0.763%.

Tonight, the United States is going to release its weekly unemployment claims data, preliminary GDP for the 3rd quarter and pending home sales for September. US GDP growth for Q3 is expected to be the strongest ever since the record collapse in the second quarter. Market panic will grow if there will be any inconsistency from forecasts.

Here, the development of current trends can be expected – commodity assets will decline in the morning, while defensive assets will be in high demand.

EUR/USD

Today, the ECB will hold a regular meeting on monetary policy. There is an increasing pressure recently on the ECB in connection with the newly introduced restrictive measures, but the chances of some easing steps remain low due to several reasons.

First, the bank's management, represented by Lane and Lagarde, has repeatedly emphasized that it will not make decisions before December.

Second, the depth and impact of the new restrictive measures cannot yet be assessed, since there are no statistics on their impact on the economy.

Third, the ECB currently has many tools to manage the situation. In particular, more than half of the ECB's € 1.350 billion package under the "Pandemic Emergency Procurement Program (PEPP)" remains unused. The bank expects to extend this program until at least the end of June 2021, which means there is no need to rush.

Nevertheless, the tone of the comments is expected to be dovish. We can assume that ECB may announce an increase in the pace of purchases (while remaining within the current program), and it is also possible to announce plans to introduce new stimulus measures by December.

If the forecasts come true, then EUR/USD will be able to consolidate near the lower limit of the channel.

However, the option to exit the channel down looks more likely, since there are additional forces acting on the euro at the moment, pushing it to sell. The growing chances that Trump will be re-elected after the approval of his candidacy to the Supreme Court can be considered as one of the drivers. Hence, the dominant scenario is moving to the level of 1.15.

GBP/USD

The pound is not yet under much pressure as the euro, but everything has its time. First, Johnson's cabinet is obviously pulling out of Brexit negotiations, awaiting the US elections' result, which increases the chances of a no-deal exit. Secondly, the new restrictive measures announced by Germany and France have already negatively affected the prospects for the euro, and apparently, the UK is next. Last week, the number of new COVID-19 cases steadily exceeded 20 thousand people, which is three times more than last spring.

Today, the Bank of England will publish data on mortgage and consumer lending in September, which will indirectly indicate a change in inflation expectations and adjust forecasts following the meeting, which will be held on November 5. A slight expansion of the asset buyback program with a forecast from 745 to 845 billion pounds has already been considered in the quotes.

The GBP/USD pair remains within the rising channel, but moving to the lower limit of 1.2830/50 looks the most reasonable. However, strong movements are unlikely, as the pound will wait for the results of the US election.