Last week, financial markets were faced new tension – economic data deteriorated further and did not provide an opportunity for investors to relax, while tensions between the U.S. and China continued in the political arena. U.S. President Donald Trump has maintained an extremely aggressive negotiating position and surprised market participants by increasing pressure regarding devaluation of Chinese yuan and possible currency manipulation, banning U.S. government from buying equipment from Huawei and urging the Federal Reserve to cut interest rates by 1%.
Meanwhile, other central banks around the world have also taken steps to ease monetary policy. The Bank of New Zealand members lowered interest rates by as much as 0.5%, while the market expected only 0.25% change, arguing for growing uncertainty and slowing activity in the global economy. India, Thailand and the Philippines also cut interest rates last week.
Data was scarce in the biggest economy, although it did not show positive changes. Investors watched services purchasing managers index, which has dropped to 53.7 points - the lowest point since 2016, indicating, that services segment growth is slowing down together with manufacturing, despite some lag. Producer price index was 1.7% per year, which was the lowest growth since 2016, indicating that prices of manufactured goods are growing slower and pressure on overall country's inflation in the upcoming months will be also lower. In general, U.S. data remains rather pessimistic, therefore market participant expectations are to see at least 2 interest rate cuts this year to ease the economic situation.
Main currency pair EUR/USD has appreciated to 1.120-point level, which it tried to breach throughout all week but failed to establish above it. In the European political arena, Italy has attracted the most attention with disagreements between the coalition members. Market participants speculated, that there is a possibility of new elections. It pushed Italy's 10-year bond yield to increase from 1.5% to 1.8% level. Among economic data in the old continent, Germany's manufacturing volumes were in the spotlight, which contracted -5.2%, compared to same month a year ago, or -1.5% compared to previous month. Since Germany is the largest economy in Europe and it imports from smaller countries around it, the downward trend will undoubtedly be increasingly pronounced in smaller neighboring countries as well. The Germany bond market is also sending negative signals as 10-year sovereign debt yields reached new lows last week at -0.6%, which is lower than ECB's set interest rate of -0.4%. It is interesting, that Germany's financial minister has mentioned that they are considering to take advantage of these favorable market conditions and borrow more to finance climate change-related investments. EUR/USD has ended the trading week appreciating 0.8%.
Most important Asian pair USD/JPY has consistently depreciated during the week and has reached a new lowest point in the last 18-months period. Japan economic data was fairly positive. Country's economy in the second quarter grew 1.8% per year and household spending increased 2.7% per year. USD/JPY has ended the trading week dropping -0.9%.
The British pound was among the worst performing developed countries currencies. There were no big news in the political arena regarding Brexit, although market participants were surprised by significantly worsened economic data. In the second quarter Country's economy has expanded 1.2% per year or has contracted -0.2% compared to the first quarter. This economic downturn has greatly disappointed investor expectations and triggered a sharp fall during Friday's trading session. The slowdown was mainly driven by cuts in industrial investment due to Brexit uncertainty, while services sector showed no growth. Industrial output declined -0.6% per year. GBP/USD has ended the week depreciating -1.1%.
This week will begin fairly calmly and there are no important data announcements planned. On Tuesday, investors will be watching Europe's and Germany's ZEW index results, Britain's labor market results and U.S. inflation indicators. Wednesday will begin with important data from China, about the changes in investment, retail sales and manufacturing volumes. Preliminary economic growth data for Germany and Europe is expected on Thursday, although investors in Germany are expecting to see a contraction. Britain's inflation figures will also be published on Thursday. Investors will be waiting for retail sales data for England and the U.S. on Friday.
According to Admiral Markets market sentiment data, EUR/USD long positions are held by 40% of investors (dropped -17 percentage points compared to last week's data) in the main Asian pair USD/JPY 75% of investors hold long positions (dropped -2 percentage points). In GBP/USD pair 79% of participants expect growth (increased +8 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 with fundamental projections and technical analysis.
Sources: bloomberg.com, reuters.com, Admiral Markets MT4 Supreme Edition, investing.com
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