U.S. dollar continued to depreciate

July 27, 2020 10:30

Last week the foreign exchange market showed consistent trends and the U.S. dollar depreciated on all trading days and reached its lowest point since September 2018.


In the world's largest economy, the data has been mixed and has given investors reason to worry about a slowdown in recovery from the pandemic. Among the good news was the preliminary manufacturing PMI index which rose from 49.8 to 51.3 points and reached the expansion zone. In the real estate market, sales of new homes returned to pre-pandemic levels in June, but secondary market sales remain about -15% below. Investors are discussing smaller indicators that no longer show further positive trends in recent weeks, including restaurant reservations and visits, air passengers, retailers and retail spending, which could potentially face additional negative pressures in the future as the state pays for increased unemployment benefits due to pandemic. The number of new jobless claims rose from 1.3 to 1.4 million a week and was the first rise since the March highs, giving market participants additional reason to worry about a slowdown in the recovery.

The coronavirus trend showed no signs of improvement. The focus remained on new highs of cases in the United States, where the number of new cases reached 78,000 per day. Most cases are reported in California, Florida and Texas. In Brazil, the spread of the virus is also slowing, with the number of new cases reaching as many as 65,000 a day. In India, the number rose to 49 thousand a day and only in Russia did the situation shows signs of stabilization, with the number of cases falling from 6.5 to 5.8 thousand a day.


The main currency pair EUR/USD reflected the weakening trends of the U.S. dollar and rose to the level of 1,165. Investors focused on an agreement by members of the European Union on a 750 billion EUR stimulus program expected to help recover from the pandemic. Members agreed to borrow a total of 750 billion and allocate 390 billion in subsidies and 360 billion in various soft loans. Meanwhile, economic data was scarce and among the most important was the preliminary manufacturing PMI index, which rose from 47.4 to 51.1 points. The EUR/USD pair closed the week with an increase of 2.0%.


The most important Asian pair, the USD/JPY, remained in the trading channel for the past 4 months and ended the week at the lower end of the range. Economic data included a change in Japanese export volumes in June, which stood at -26% year-on-year, and annual inflation, which was just 0.1%. The preliminary manufacturing PMI index was at 42.6 points and remained in negative territory. USD/JPY ended the week dropping -0.8%.


The British pound returned to 4-month highs against the U.S. dollar. Economic data included retail sales in June, down just -1.6% from a year earlier, and the preliminary manufacturing PMI index also showed a recovery, rising from 50.1 to 53.6 points. GBP/USD ended the week appreciating 1.8%.

Economic Events

This week will start with data from the German lfo Business Climate Index and the number of U.S. industrial orders. The results of the U.S. Consumer Confidence Index will be monitored on Tuesday. On Wednesday, the focus will shift to a U.S. Federal reserve's meeting and press conference in an effort to understand how the scope of the promotion will change in the near future. German and U.S. labour market data and economic developments in the second quarter will be monitored on Thursday. Japanese industrial volumes and the results of the economic change in Europe in the second quarter will be expected on Friday.

According to Admiral Markets market sentiment data, 17% of investors have long positions in the EUR/USD pair (down -4 percentage points from last week's data). In the main Asian pair USD/JPY, 61% of investors have long positions (up 2 percentage points). In the GBP/USD pair, 30% of participants expect a rise (down -8 percentage points). Such market data is interpreted as contraindicative, so EUR/USD and GBP/USD are expected to rise and USD/JPY to fall. The analysis of positioning data needs to be combined with fundamental projections and technical analysis.

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

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