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US dollar depreciates to August lows

November 04, 2019 10:00

USD Depreciates

Last week, investors had a high appetite for risk, causing the US dollar to depreciate and reach a three-month low.

Market participants were not frightened by the canceled meeting of US and Chinese presidents, which was supposed to take place in Santiago, Chile, during which a partial agreement on the terms of international trade was expected. Nevertheless, US representatives remained optimistic and said they expected the agreement to be finalised and signed in the coming weeks.

Economic data in the US was very diverse. Investors' expectations were outpaced by the country's third-quarter economic annualised growth of 1.9% and labor market results that showed 128,000 jobs were created in September. Although both indicators are classified as lagging, the results exceeded forecasts well enough to dispel gloom over slowing economic growth.

Among the worse news was the ISM manufacturing index, which was down to 48.3 points, while PMI was 51.3 points, showing moderate growth. In the US, this index is calculated by two organisations, so investors are tracking both, though sometimes the results are mixed. ISM data covers larger multinationals more, while PMI surveys medium and small companies, so both indices are useful for investors in analysing economic trends.

There was also a meeting of the Federal Reserve, which cut the interest rate by 0.25%, and Jerome Powell said the goal would now be to keep interest rates stable if the economic situation does not change significantly.

The main currency pair EUR/USD reflected the weakening US dollar. Economic data in Europe did not come as a surprise and reflected about the continuing slowdown. Preliminary results indicated that in the third quarter, Europe grew at 1.1% per year and inflation stood at 0.7%. The number of unemployed in the German labor market has increased by 6,000, which is not a significant change, but looking at the results of recent months, the country's labor market shows stagnation, especially due to declining industrial sector volumes. If redundancies start to accelerate, it would be an important and extremely negative signal for future trends. EUR/USD has ended the week appreciating +0.8%.

The key Asian pair, USD/JPY, depreciated last week and remained below the 200-day moving average. Economic data in Japan was mixed: preliminary industrial growth was 1.1% year-on-year in September, but the sector managers' purchasing index continued to fall to 48.4 points, its lowest level since mid-2016. A meeting of the central bank was also held, but monetary policy remained unchanged. USD/JPY closed the week depreciating -0.5%.

The British pound appreciated, thanks both to the US dollar and to domestic policy news. Prime Minister Boris Johnson has succeeded in convincing Members of the House about the early elections to be held in December this year. It is hoped that a majority will be elected during these meetings, which will allow a decision to be taken on the Brexit situation. Among the economic indicators was the manufacturing PMI, which rose to 49.6 points but remained in negative territory. GBP/USD has ended the week appreciating 0.8%.

This week will begin the actual manufacturing PMI indexes in Europe. US international trade figures will be released on Tuesday. European retail sales on Wednesday. A change in German industrial volumes and a meeting of the Central Bank of England are expected on Thursday. China's and Germany's international trade figures will be released on Friday.

According to Admiral Markets' market sentiment data, EUR/USD long positions are held by 23% of investors (dropped -23 percentage points from last week). In the main Asian pair USD/JPY, 54% of investors have long positions (increased +19 percentage points). In the GBP/USD pair, 32% of participants expect a rise (-11 percentage points). Such market data is interpreted as a contra indicator, suggesting appreciation in EUR/USD and GBP/USD pairs and depreciation in USD/JPY pair. 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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