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A positive week for U.S. dollar

August 19, 2019 11:00

Last week sentiment in the financial markets remained negative, which encouraged investors to choose safer currencies and the U.S. dollar has appreciated. Economic data from all main economies showed a slowdown of growth, and in Germany, a contraction of the economy was recorded.

In political news, Donald Trump has somewhat eased his stance on new import duties on Chinese goods, likely due to increased stock market volatility. Under the new plan, some of the goods will be subject to customs duties from the beginning of September and some by mid-December. Delayed goods include phones, computers, video equipment, toys and this political move is claimed to prevent inflation before Christmas when people buy presents.


U.S. economic data was ambiguous. The country's woes in the industrial sector were increasing, as the volume growth slowed to 0.5% per annum. Industry-related sectors, such as freight transport, have also shown declining sentiment. According to the Cass Transportation index, the need to transport goods has been falling for the eight consecutive month and has contracted compared with the last year. Sales of new trucks are virtually stopped, recording a drop of -80% compared to the same period last year. Meanwhile, the country's citizens are not so negative and continues to actively consume, which is very important as domestic consumption accounts for about 70% of the country's economy. In July, retail sales increased by 3.5% per annum. Annual inflation stood at 1.8% in July and accelerated from 1.6%.


Main currency pair EUR/USD recorded one of the worst performances among developed economies and felt below 1.11 level. This decline was prompted by comments from the European Central Bank on possible economic stimulus, which is likely to be announced at the September meeting. The news has made investors even more active in buying German bonds, which yields have fallen as low as -0.7%, an all-time low. Political problems in Italy have not diminished and market participants are waiting for a decision to hold early elections, which will bring additional uncertainty in the market. Among economic data in the old continent was Germany's ZEW index, which describes the country's economic expectations, and its value dropped to -44.1 points which was the lowest since 2011. According to preliminary data, the German economy stagnated compared to last year and contracted -0.1% quarter-on-quarter basis. Germany remains one of Europe's major troubles, as it is only a matter of time before the weaknesses of the biggest economy will pass on smaller countries that supply it with goods and services. EUR/USD has ended the trading week declining -1.0%.


Most important Asian pair USD/JPY almost reached 105-point level, which is the lowest point since March 2018, although it slightly rebounded afterwards. There were no important data announcements in Japan. USD/JPY has ended trading week appreciating 0.6%.


Despite a low risk appetite from investors, the British pound recorded an increase in value against the U.S. dollar. This was primarily determined by positive economic data from the country, which made investors to step back from short-selling the pound and close open positions. In political area, participants speculated about potential early Parliament's election, since existing Conservative Party position is not sufficient to get any approval for Brexit situation. Retail sales in England increased 3.3% per year, while inflation stepped higher to 2.1% level. GBP/USD finished trading week appreciating 1.0%.

Economic Events

This week will begin with international trade data from Japan, and later final Europe's inflation figures will be announced. On Tuesday and Wednesday there are no important announcements planned, although on Wednesday evening the U.S. Federal Reserve's last meeting minutes will be announced and investors will look for clues, how members are seeing monetary policy changes in upcoming months. On Thursday, investors will be watching preliminary manufacturing purchasing managers index results and will analyze European Central Bank meeting minutes. Also on Thursday Jackson Hole symposium will begin, which will bring together key central bank members which will give speeches. On Friday, the symposium will feature a speech by Jerome Powell, the head of the U.S. Federal Reserve, which could increase volatility in the markets.

According to Admiral Markets market sentiment data, EUR/USD long positions are held by 77% of investors (increased +27 percentage points, compared to last week's data). In the main Asian pair USD/JPY 59% of investors hold long positions (dropped -16 percentage points). In GBP/USD pair 73% of investors expect growth (dropped -6 percentage points). This kind of market data is interpreted as a controversial indicator, therefore depreciation is likely in EUR/USD, GBP/USD and USD/JPY pairs. 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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