The U.S. dollar has changed direction and appreciated significantly

March 16, 2020 10:30

Stock market

At the beginning of last week, the U.S. dollar turned around unexpectedly and began to rise rapidly, eliminating the losses of the last few weeks. Negative sentiment in the markets over the coronavirus has prompted investors to return to safe currencies.

USD

U.S. economic data was mostly in-line with market expectations but was not in the spotlight. February inflation stood at 2.3% per year and remained stable in recent months. The University of Michigan consumer confidence index fell from 101.0 to 95.9 and reached a 5-month low. As the media extensively analyzes the situation of the corona virus and the number of infected increases, anxiety among the population is also increasing, which is worsening general sentiment and is damaging the economy.

Euro

The main currency pair, EUR/USD, continued to be driven by U.S. sentiment, depreciating to a level of 1,110, which is a 200-day moving average. The European Central Bank has announced that it will not change interest rates, but will increase the volume of the bond purchase program and has allocated an additional EUR 120 billion for the purchase of private business debt instruments. It has also been announced that soft loans will be made available to European commercial banks to enable them to lend more actively to small businesses, which are now facing the greatest financial pressures. Economic data included German exports, which dropped -2.1% YoY in January and considering exports to China, the y have dropped as much as -6.5%. Industrial output in the largest European economy declined -1.3% over the year, although the decline was lower than expected and overall the data showed at least a temporary stabilization. Meanwhile, European industry as a whole fell by -1.9% and retained the negative sentiment in the sector. EUR/USD has depreciated -1.6% during the week.

JPY

The key Asian pair USD/JPY has also stabilized and appreciated, signaling a strengthening of the U.S. dollar. Amount of significant data was minimal, with investors observing actual economic performance in Q4 2019, with a -1.8% year-over-year decline, compared to Q3 and even -7.1% compared to same quarter a year ago. Market participants expect to see Japan in recession, as lower activity in the first quarter of 2020 is likely to spur further contraction. USD/JPY has ended the week appreciating +2.4%.

GBP

The British pound depreciated against the U.S. dollar to its lowest point in the last half. Economic data was limited, and the most significant indicator was the -2.9% annual decline in manufacturing. However, unscheduled meeting of the country's central bank last Wednesday caught investors' attention. It decided to cut the interest rate from 0.75% to 0.25% and announced additional financing tools for small and medium-sized businesses. GBP/USD has ended the week depreciating -5.9%.

Economic Events

This week will begin with important economic indicators from China, which will point to the situation in February, when there was the biggest outbreak of the virus. U.S. retail and industry volumes will be released on Tuesday. Wednesday will begin with Japanese export performance, followed by a meeting of the U.S. central bank, where investors look forward to further interest rate cuts. On Thursday and Friday no important data is scheduled. Apart from the economic indicators calendar, investors will also be very focused on various policy meetings as they will discuss quarantine measures and various incentive packages that will undoubtedly affect markets and sentiment.

According to Admiral Markets market sentiment data, 38% of investors have long positions in the EUR/USD pair (increased +16 percentage points compared to last week). In the main Asian pair USD/JPY, 51% of investors have long positions (down -21 percentage points). In the GBP/USD pair, 68% of participants expect a rise (increased +34 percentage points). Such market data is interpreted as contraindicative, suggesting appreciation in EUR/USD pair, depreciation in GBP/USD pair, and USD/JPY in a neutral position. Analysis of positioning data should be combined with fundamental projections and technical analysis.

Sources: bloomberg.com, reuters.com, Admiral Markets MT4 Supreme Edition, investing.com

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