U.S. dollar has retreated from 2-year highs

Last week, investors were rather optimistic in the markets, and safer assets, including the U.S. dollar, depreciated. Greater risk appetite was fuelled by news from the political arena, where the British Parliament managed to prevent an exit from the European Union without an agreement and the U.S. President's optimism about progress in negotiations with China.

USD

The data of the world's largest economy has maintained previous trends. The manufacturing PMI was 49.1 points and indicated a corrective sentiment in this business segment. The smaller components of the index, such as employees and new orders, both showed a decline and reached points 47.4 and 47.2 respectively. Overall, the country's labour market remained strong and 130,000 new jobs were created in August. Most were added by public institutions, while companies in the industrial sector showed either stagnation or a slight contraction, suggesting that business sentiment also feeds into labour market trends. Also, U.S. Central Bank chair Jerome Powell gave a speech during a press conference last week, who maintained his tone and said members were prepared to respond to changing market conditions, which many interpreted as a planned cut in interest rates at the September meeting.

Euro

The main currency pair EUR/USD has rebounded from its lowest point since May 2017. The good news was that Italy had succeeded in forming a new coalition government when the populist party Five Stars joined the Democratic Party. The new government is expected to have better relations with the European Union and more discipline in the country's finances. Among the economic results were the manufacturing PMI, which remained in negative territory. European and German figures were 47.0 and 43.5 respectively, but Italy and Spain also showed results below 50 points. European retail sales increased by 2.2%, suggesting that consumers remain positive. EUR/USD has ended the week appreciating 0.4%.

JPY

Most important Asian pair USD/JPY rose slightly despite U.S. dollar trends. Among the economic data was the manufacturing PMI, which dropped to 49.3 points, reflecting ongoing difficulties for exporting countries. Household expenditure growth slowed to 0.8% per year. USD/JPY has ended the week appreciating 0.6%.

GBP

The British pound was in a positive sentiment when Boris Johnson's plans to leave the European Union without agreement collapsed. Parliament voted and passed a law obliging the prime minister to ask for an extension of Brexit if no agreement was reached and approved by English MPs. Mr Johnson then announced early parliamentary elections but they were rejected when less than half of the House voted in favour, but more than two-thirds of the votes were needed to get it approved. Among the economic data was the manufacturing PMI, which reached 47.4 points. GBP/USD has ended the week appreciating 1.0%.

Economic Events

This week will begin with Japan's second-quarter economic growth, German - Chinese international trade results, and changes in Britain's industrial volumes. On Tuesday, results for Italy and France will be released, along with Britain's labour market figures. On Wednesday, no important data was scheduled. On Thursday, the focus will shift to the European Central Bank meeting and its decisions, which may be substantial and likely to affect currency market volatility. U.S. inflation figures will also be published. U.S. retail trade data is expected on Friday.

According to Admiral Markets market sentiment data, EUR/USD long positions are held by 47% of investors (dropped -35 percentage points, compared to last week's data). In the main Asian pair USD/JPY 45% of investors hold long positions (dropped -11 percentage points). In GBP/USD pair 53% of participants expect growth (increased +6 percentage points). This kind of market data is interpreted as a controversial indicator, therefore appreciation is likely in EUR/USD and USD/JPY pairs and depreciation in GBP/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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