U.S. dollar appreciated to 2-year highs

Last week was difficult for investors in the currency market. During the first half of the week, the U.S. dollar consistently appreciated to a 2-year high, while there was an active debate about the threat of escalating trade war between the U.S. and China, which prompted the choice of safe currencies. Meanwhile, U.S. dollar depreciated since Wednesday evening, which many investors were not prepared for, as economic data in the U.S. was the strongest among developed economies, Federal Reserve's position was neutral and uncertainty in the market remained high, which should have helped to retain strong U.S. dollar positions.

Also on Wednesday evening, Federal Reserve's meeting minutes were published. Members have retained neutral positions and have stated, that current monetary policy is in-line with the economic situation and there is no reason for any change. Many of the current members of the bank describe their position as patient, waiting for more significant changes in economic data, which still shows growth in recent months, but its pace is steadily declining. Interestingly, the market expectations for 2019 are to see at least a single cut in interest rates, as evidenced by the U.S. bond market, where short-term government bonds generate lower returns than the Federal Reserve's interest rate.

Economic data in the U.S. has retained its previous tendencies and has indicated a consistent slowdown of growth. Preliminary manufacturing Purchasing Managers Index has corrected from 52.6 to 50.6 points and has reached a neutral level, which divides optimistic and pessimistic expectations. This indicator was the lowest in the last 3 years and business confidence component has dropped to 2012 lows, which overall indicates, that U.S. manufacturing sector participants are becoming conservative and pessimistic regarding upcoming months. Unemployment level last week remained at 211 thousand and indicated a strong and stable labour market.

EUR/USD

Principal currency pair EUR/USD has reflected U.S. dollar. Economic data was scarce in Europe, and remained negative. Most of the attention was drawn to preliminary manufacturing PMI index, which remained in the lows in Germany and Europe, accordingly at 44.3 and 47.7 points, which indicates, that sector is struggling with increasing probability of retreat. Germany has also announced the Ifo business climate index, which fell to 97.9 points and was the lowest since the beginning of 2015. The EUR/USD ended the trading week appreciating 0.4%.

USD/JPY

The most significant Asian pair, the USD/JPY, has also reflected rapidly changing sentiment in U.S. dollar segment. Although the week began optimistically, later the pair depreciated significantly and has returned to the 4-month low. Economic data in Japan was positive – in the first quarter of 2019, economic growth was 2.1% per year, and exports fell by -2.4% and preliminary manufacturing PMI was 49.6 points and returned to the negative territory. The USD/JPY ended the trading week dropping -0.7%.

GBP

British pound investors remained pessimistic. On Friday, Theresa May has announced her resignation from the post and from the leader post of the conservative party from June 7th. Theresa May has failed to reach an agreement between the country's politicians and the European Union and is forced to resign. The Brexit situation remains deadlocked. Meanwhile, economic data was positive in the country – inflation was 2.1% and retail trade growth was at 5.2% per year. The GBP/USD has ended the trading week unchanged.

Economic Events

This week will begin with important news from the European Union, where European Parliament elections took place on Sunday and investors will follow results trying to understand how many votes populists and anti-EU politicians have gotten. Monday is also a day off in the U.S. U.S. consumer confidence expectations will be announced on Tuesday. No important news planned on Wednesday and Thursday. On Friday, U.S. personal income data will be announced.

According to Admiral Markets market sentiment data, EUR/USD long positions are held by 37% of investors (dropped -36 percentage points, compared to last week's data). In the main Asian pair USD/JPY, 79% of investors have long positions (increased +19 percentage points). In GBP/USD pair 74% of participants expect growth (dropped -17 percentage points). This kind of market data is interpreted as a controversial indicator, therefore depreciation is likely in GBP/USD and USD/JPY pairs and appreciation in EUR/USD pair. Analysis of positioning data should always be accompanied by fundamental projections and technical analysis.

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

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