The global reserve currency depreciated

Positive sentiment prevailed in financial markets last week and investors were looking for riskier alternatives to earn higher returns. In this environment, the U.S. dollar has retreated from a 1-month high.

USD

U.S. economic data was quite optimistic. The preliminary manufacturing PMI index was at 59.1 points and significantly exceeded the market forecast of 56.5 points. The service sector index was 57.5 points and also suggested a strong positive sentiment among business participants. The existing home sales remained highly active, with annual sales reaching 6.76 million homes in December. The number of new jobless claims fell slightly from 0.97 to 0.90 million a week.

The spread of the virus around the world has shown a moderate slowdown. The situation in the U.S. continued to improve, with the weekly average falling from 228 to 184 thousand cases a day. The number of people vaccinated in the country rose from 13.7 to 19.8 million and the change was 6.1 million. Overall, U.S. has already vaccinated about 6.0% of the population. Outbreaks of the virus continue in the United Kingdom, with an average of 38 thousand new cases per day. The virus remains particularly active in Spain, where the number of daily cases is at an all-time high. Around 60 million doses of the vaccine have been injected worldwide, and that level has risen from 40 million last week.

Euro

The main currency pair EUR/USD mainly reflected the sentiment of the U.S. dollar, which led to the rise of the pair's value to the level of 1,207-points. Among the economic data in the Europe were preliminary PMI indices: the manufacturing PMI index stood at 54.7 and the services PMI at 45.0. Both indicators were slightly worse than last month, but slightly better than market participants' forecasts. A meeting of the European Central Bank was held on Thursday. It decided on further monetary policy. No significant changes were adopted during the period - the interest and quantitative incentive program remained unchanged. The ongoing strategy of the bank does not show positive signs, when the annual inflation of Europe in December was negative at -0.3%. The main reasons mentioned were reduced VAT in Germany, low energy prices and reduced overall demand due to the pandemic situation. EUR/USD pair closed the week appreciating +0.8%.

JPY

The main Asian pair, USD/JPY, fluctuated very slightly below the 104.0 level and the 50-day moving average on a daily chart. Among the economic data, there was a change in export volumes of 2.0% year-on-year. Preliminary PMI indices were in a negative territory: manufacturing PMI index was at 49.7-point level and services at 45.7-level. According to December data, annual inflation was negative at -1.2%. USD/JPY ended the week depreciating -0.1%.

GBP

The British pound appreciated against the U.S. dollar and reached a level of 1,374 at the end of the week, the highest since May 2018. Economic data included annual inflation of 0.6% in December and retail sales data, which showed 2.9% higher activity than a year ago. The manufacturing PMI index was at 52.9 points and 38.8 points in the services sector. GBP/USD ended the week appreciating +0.7%.

Economic Events

This week will start with data from the German Ifo Climate Index and the speech by Christine Lagarde, Governor of the European Central Bank. English labour market data and the U.S. consumer confidence index will be monitored on Tuesday. On Wednesday, investors will look forward to a meeting of U.S. Federal Reserve members and decisions on interest rates and the stimulus program. While no major changes are expected, the focus will be on a press conference to gain a better understanding of members ’position and perspective on the current economic situation. Preliminary inflation in Germany in January and preliminary economic growth in the United States in the fourth quarter will be observed on Thursday. On Friday, investors will expect Germany's preliminary fourth-quarter economic growth and the country's labour market indicators.

According to Admiral Markets market sentiment data, 41% of investors have long positions in the EUR/USD pair (down -39 percentage points from last week). In the main Asian pair USD/JPY, 26% of investors have long positions (fell by -45 percentage points). In the GBP/USD pair, 31% of participants expect a rise (down -28 percentage points). Such market data is interpreted as contraindicative, so appreciation in all major pairs - EUR/USD, GBP/USD and USD/JPY pairs is likely. 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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