Last week, investors were once again cautious about the U.S. dollar and the global reserve currency index has corrected. Although overall trends remained unchanged, the weakening of the U.S. dollar was fueled by economic data in the country, to some extent disappointing market participants, while U.S. Federal Reserve's chief Jerome Powell was wary of further economic growth, suggesting that looser monetary policy in the largest global economy is likely to persist.
Economic data in the U.S. was worse than expected. Annual inflation in the country was 1.8%, and excluding energy and food prices, it was 2.3%. Retail sales grew 3.1% year-over-year and fell short of market expectations. The worst performance was again in the industrial sector, where volumes contracted by -1.1% per year and industrial price index growth decelerated from 2.0% to 1.6% per year, which may also contribute to downward pressures on inflation over the longer term. The number of new unemployed applications was 225 thousand, up from 212 thousand.
The main currency pair EUR/USD was positively affected by better than expected data from Europe and disappointing U.S. figures. Economic data in Europe has indicated an unexpected positive impulse. European and German ZEW index values were -1.0 and -2.1 respectively, which is a significant change from the level of -20 points a month ago. European industrial output contracted -1.7%, down from previous months and market expectations. Significant news also came from Germany, whose economy grew by 0.5% per year in the third quarter and managed to avoid a technical recession. Although the industrial sector and exports turned out to be poor, domestic consumption and the growth of business inventories succeeded well. Europe's preliminary industrial growth in the third quarter was also surprising at 1.2% per year and accelerated slightly. All in all, this news has allowed investors to be relieved that the situation in Europe has at least stabilized and that the downturn is not going to continue. The EUR/USD ended the week appreciating 0.3%.
The key Asian pair USD/JPY has reflected weakening U.S. dollar and did not establish above the 200-day moving average. Among economic indicators, investors focused on Japan's third-quarter growth performance, which fell short of expectations, with annual growth of just 0.1%, down from 1.8% in the previous quarter. USD/JPY has ended the week depreciating -0.4%.
The British pound appreciated moderately last week. The country is awaiting a parliamentary election in mid-December, which is expected to lead to a majority and finally to a decision on Brexit. Economic data included the country's third-quarter economic growth of 1.0% per year. Manufacturing volumes fell by -1.4% year-on-year and continued to point to continuing uncertainty in the sector. Inflation reached 1.5% and was the lowest since the end of 2016. Only retail sales data were somewhat positive, showing 3.1% year-over-year growth. GBP/USD has ended the week appreciating 1.0%.
This week will start off quietly with no major economic news scheduled for Monday and Tuesday. Wednesday will begin with Japan's international trade figures, and the evening will feature minutes from the last meeting of the U.S. central bank, where investors will look for clues about future monetary policy and possible changes in interest rates. Existing home sales results in U.S. will be announced on Thursday. On Friday, the focus will shift to the preliminary manufacturing PMI indices in key economies, as well as a press conference by the new head of the European Central Bank, Christine Lagarde.
According to Admiral Markets market sentiment data, EUR/USD long positions are held by 51% of investors (dropped -20 percentage points, compared to last week's data). In the main Asian pair USD/JPY 40% of investors hold long positions (increased +12 percentage points). In GBP/USD pair 24% of participants expect growth (dropped -26 percentage points). This kind of market data is interpreted as a contraindicator, therefore appreciation is likely in USD/JPY and GBP/USD pairs and EUR/USD sentiment is rather balanced. Analysis of positioning data should always be accompanied with fundamental projections and technical analysis.
Sources: bloomberg.com, reuters.com, Admiral Markets MT4 Supreme Edition, investing.com
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