Financial markets have been relatively calm last week and volatility has been low most of the time. Only on Friday afternoon did volatility increase a bit, when Jerome Powell, the head of the U.S. Federal Reserve, gave a speech on the country's economic situation and monetary policy at the Jackson Hole Symposium. In the Fed's view, the U.S. economic situation remains sound and favourable, although there are a number of material risks in the market that do pose a threat to positive trends. Mr. Powell removed from his speech the phrase about interest rate adjustments in the middle of the business cycle, which market analysts saw as a readiness to cut them further. Currently, market participants expect almost a 100% probability of a 0.25% decrease in interest rates at the September meeting.
The data for the world's largest economy was mixed. The preliminary manufacturing purchasing managers index has attracted a lot of attention, since it has dropped from 50.4 to 49.9 points and hit the negative zone for the first time since September 2019. This suggests that the domestic industry continues to face challenges in maintaining stable volumes and is not likely to catch up in the coming quarters. At the same time, investors are starting to speculate, that the industry slowdown is likely to spill over to the sentiment of the service sector, which is a much larger part of the country's economy. Meanwhile, the real estate market showed positive trends and slight growth after months of negative performance.
Main currency pair EUR/USD has reflected U.S. dollar tendencies and the first half of the week was very calm, although on Friday the value of the pair increased significantly due to the depreciation of the U.S. dollar. Concerns over Italy remain as Prime Minister Giuseppe Conte announced his resignation and Matteo Salvini, Italian Home Minister, has announced that his party „League" is retreating from the ruling coalition and it is likely that the existing government will not be able to assemble a new one, therefore, new elections may be needed. Among economic data in Europe was the preliminary manufacturing purchasing managers index, which showed a very slight rise both in Germany and Europe, but both remain in significant contraction zone. Inflation in Europe has slowed from 1.3% to 1.0%. Germany also talked about potential economic stimulus if the situation worsened further and Germany would finance this decision by issuing 30-year bonds and they for the first time ever are without interest and yield is negative and is at -0.11%. EUR/USD has ended the trading week appreciating 0.4%.
Most important Asian pair USD/JPY also moved in-line with the U.S. dollar and finished the week trading at an 18-month low. Manufacturing purchasing managers index remained stable at 49.5 point level, although in the negative zone. The country's exports contracted by 1.6% per year, which has been 9th consecutive month of decline. USD/JPY has ended the trading week dropping -0.9%.
The British pound continued to appreciate against the U.S. dollar, which was more of a technical correction and caused by the depreciation of the U.S. dollar. There was no Brexit news and the country's prime minister Boris Johnson visited French and German leaders to discuss the situation, but there were no major breakthroughs and the situation remains deadlocked. No major data was published in the UK. GBP/USD finished trading appreciating 1.2%.
Economic Events and Data
This week will begin with Germany's lfo economic sentiment results and U.S. manufacturing orders data. On Tuesday, investors will look to the U.S. Consumer confidence index, which captures the sentiment of the population and is currently the best-looking part of the U.S. economy. On Wednesday, no important data is scheduled. Germany's labour market indicators will be watched on Thursday investors searching for cues about industrial sector weakness and later U.S. second-quarter economic growth data will be announced. Friday will begin with Japanese industry volumes and we will find out about Germany's retail trade data.
According to Admiral Markets market sentiment data, EUR/USD long positions are held by 50% of investors (dropped -27 percentage points compared to last week's data). In the main Asian pair USD/JPY 74% of investors hold long positions (increased +15 percentage points). In GBP/USD pair 54% of participants expect growth (dropped -19 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 EUR/USD sentiment is rather balanced. 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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