A correction from 3-month highs in the USD
Last week the global reserve currency retreated from 3-month highs and the U.S. dollar index recorded a fall of -0.3%. Positive sentiment in the financial markets has encouraged investors to increase risk demand and choose riskier currencies.
U.S. data was positive. Inflation has risen to 1.7% per year, while the producer price index has risen 2.8% to the highest point since 2018, prompting growing pressure on inflation due to very rapidly rising commodity prices. Another interesting fact is that rising government bond yields are also pushing higher mortgage lending rates to households - 30-year rates rose from 2.9% in December to 3.2% according to the latest data, which will likely slow down real estate market activity in the longer term. The number of new jobless claims was stable at 0.71 million a week.
Pandemic figures showed a moderately growing rate of new cases worldwide, with the weekly average rising from 400 to 418 thousand per day. The situation in the U.S. showed a further gradual improvement, with the weekly average falling from 62 to 57 thousand cases per day. The number of vaccinations injected in the country rose from 85 to 101 million and the change was as high as 16 million, indicating a rather significant acceleration of the vaccination process. Overall, the number of people vaccinated with at least one dose in the U.S. rose from 16.7% to 19.9% of the population. Globally, the number of people receiving at least one dose in Israel rose from 54% to 56%, in the United Arab Emirates from 58% to 60%, in England from 32% to 35%, and in Lithuania from 7% to almost 9%.
The major currency pair EUR/USD started the week with a drop to the level of 1,184-points, the lowest since November 2020, but later buyers returned and the pair rose to 1,195. Among the economic data in Europe were German export volumes in January, which rose unexpectedly by 1.4% compared to December, mainly due to active and successful trade with China. European industrial production rose marginally by 0.1% year-on-year in January. At the meeting, the European Central Bank did not change interest rates and the size of the stimulus program, which was left at 1.85 trillion EUR, but said it would step up its implementation and buy union members' bonds in the near future to reduce debt yields, which had risen relatively sharply in recent months, reflecting higher inflation expectations. The EUR/USD pair closed the week with a rise of 0.4%.
The top Asian pair, USD/JPY, showed consolidation sentiment and fluctuated between 108.3 and 109.2 points. Economic data included household expenditure, which declined by -6.1% year-on-year, and average household income, which contracted by -0.8% year-on-year. The country’s monetary aggregate, M2, also showed a further acceleration in growth to 9.2% per year, and the pace has risen significantly from pre-pandemic levels below 3%. USD/JPY ended the week appreciating +0.6%.
The British pound and the U.S. dollar rose moderately, starting the week with a resistance of 1,380 and later rising to 1,400 points. Economic data included industrial production, which contracted by -4.9% year-on-year, while construction volumes were -3.0% lower than a year ago. GBP/USD ended the week up 0.6%.
This week will start with South Korean export data and key indicators from China, including retail sales, industrial production and long-term investment. Japanese and U.S. industrial production data and U.S. retail sales will be released on Tuesday. Japan's export volumes and actual European inflation in February are expected on Wednesday. Also on Wednesday evening U.S. Federal Reserve meeting and members’ decisions on further stimulus will be in the spotlight, especially since bond yields have risen. A meeting of the Bank of England will be held on Thursday and a meeting by the Bank of Japan on Friday.
According to Admiral Markets market sentiment data, 43% of investors have long positions in the EUR/USD pair (down -37 percentage points from last week). In the main Asian pair USD/JPY, 20% of investors have long positions (up 4 percentage points). In the GBP/USD pair, 49% of participants expect a rise (up 2 percentage points). Such market data is interpreted as contraindicative, therefore EUR/USD and USD/JPY are expected to rise and the GBP/USD situation is in the neutral zone. 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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