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U.S. dollar appreciated while negative sentiment persisted

May 20, 2019 13:30

US/China trade talks impact the fundamental

Last week, we could feel significant uncertainty in the market. The main reason for this came from significantly increased tensions in the U.S.' and China's negotiations on international trade. More than week ago, the U.S. increased import tariffs for goods from China, which encouraged a response from the second global economy. On Monday, it was publicly announced that China would be increasing tariffs up to 25% on goods from U.S., which exceed 60 billion USD value of annual trade. The decision from the countries to increase taxes and pressure in the negotiations has disappointed market and investor expectations, which led to an increase in prices of safe assets, including the U.S. dollar, which consistently appreciated during the last week.


Economic data from the U.S. indicated a consistent slowdown in growth, although it was in-line with market expectations. Most of the attention was drawn to retail sales, which showed 3.1% growth per year. Industrial production has increased by 0.9% per year, and growth significantly slowed from a 3-4% growth level which was prevalent during recent years. In the real estate market, the housing starts indicator was announced - whose yearly change was negative for the seventh month in a row, which indicates that negative sentiment persists in the market making it so activity does not rebound. Unemployment claims decreased to 212 thousand last week, and did not show worsening tendencies in the labour market.


Principal currency pair the EUR/USD was marked by consistent weakening, depreciating across the whole week. Although European data remained poor, a strong tendency in the pair is mostly attributed to an overall lower risk-appetite in the financial market. The data showed further stagnation across European economies. Industrial production volumes contracted -0.6% in March. ZEW economic index slipped back to a negative zone, and was -2.1 in Germany and -1.6 in Europe. According to preliminary data, Germany's economy grew 0.6% in the first quarter and Europe's 1.2% per year. Inflation in Europe marginally increased to 1.7% per year. Overall, data indicates that the manufacturing sectors of the main economies are facing difficulty, and is recording the downturns that will be visible in GDP over the longer term. The EUR/USD has ended the trading week dropping -0.7%.


Most important Asian pair, the USD/JPY began the week significantly depreciated, in response to news that China is increasing import tariffs. Although for the rest of the week, the pair had moderately increased and recovered lost positions. Data was scarce in the country, although among the published data were details of bank lending changes in Japan, which was at 2.4% per year and money supply in the market, which also increased by 2.6%. Both indicators show that liquidity is consistently increasing in the country, which eases conditions to reach economic expansion. USD/JPY has ended the trading week appreciating 0.1%.


The British pound last week has recorded one of the worst results among developed western economies. Although the data was scarce, negative sentiment was alleviated by news from the political arena. It was announced that Brexit negotiations between the Tories and the Labour party were not successful, and were terminated in response. At the end of the week it was also announced that in June, Prime Minister Theresa May possibly resign from her post. Such poor news as this, in addition to Brexit, (which remains as a dead-end) encouraged investors to sell the pound, which has fallen to its lowest point in the last 4 months. The GBP/USD ended the trading week depreciating -2.2%.

Economic Events

This week will begin with news from Japan, where the economic growth of the first quarter will be announced. Tuesday will be fairly calm, only the U.S. real estate data release is planned. Wednesday will begin with Japan's international trade indicators, and later, attention will be drawn to Britain's inflation data. On Thursday, preliminary manufacturing Purchasing Managers Indices will be announced. On Friday, Britain's retail trade indicators and U.S. manufacturing orders will be published.

According to Admiral Markets market sentiment data, EUR/USD long positions are held by 73% of investors (increased +33 percentage points, compared to last week's data). In the principal Asian pair USD/JPY, 60% of investors hold long positions (decreased -12 percentage points). In GBP/USD pair 91% of participants expect growth (increased +20 percentage points). This kind of market data is interpreted as a contrary indicator, therefore depreciation is likely in EUR/USD, GBP/USD and USD/JPY pairs. Analysis of positioning data should be always accompanied with fundamental projections and technical analysis.

Sources: bloomberg.com, reuters.com, Admiral Markets MT4 Supreme Edition, investing.com

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