U.S. dollar appreciated in the face of political uncertainty
The first week of the year began with the rise of U.S. dollar, fueled by uncertainty in the global political arena over the U.S.-Iran conflict. Iran’s response to the U.S. decision to blow up the country’s senior military officer’s car, was to fire rockets at several U.S. military bases in the region, calling it a response to U.S. action. Following the attack, both sides abstained from sharp comments and political tensions eased in the second half of the week.
Economic data in the U.S. has been mixed. The country’s labor market results of December were the main focus: 145 thousand new jobs were created, less than the expected 160 thousand. The private services sector created the largest number of jobs, while the number of employees in the industrial segment decreased by -12 thousand, which confirms the negative trend prevailing in the last half-year. Likewise, the average hourly earnings change was observed, falling to 2.9% per year, which was the lowest level in the last 17 months. Overall, unemployment remained stable at 3.5%. The number of new unemployment applications reached 214,000 and continued to move towards the low end of the cycle.
Investors’ optimism about the U.S. dollar has also been fueled by public comments by members of the Federal Reserve on the U.S. economic outlook for 2020. James Bullard, head of the Saint Louis department, said he expects a soft landing this year, Charles Evans of the Chicago Department described the economy as in good shape, and Robert Kaplan, head of Dallas, said the U.S. could grow by 2.0-2.5% a year, if uncertainty and difficulties would decrease.
The main currency pair EUR/USD reflected U.S. dollar trends and depreciated. Old continent economic data included retail sales, which were up 2.2% year-over-year and preliminary December inflation of 1.3% yoy. In Germany, the largest economy, retail sales grew 2.8% year-over-year but the industry showed no positive signs – in 2019, car production reached 4.7 million units, dropping to its lowest point since 1997. EUR/USD ended the week depreciating -0.4%.
The most important Asian pair USD/JPY appreciated significantly, reflecting investors’ return to U.S. dollar positions. Japan’s economic performance included the manufacturing PMI index, which stood at 48.4 points and was at its lowest level in the past 3 years. Household consumption declined by -2.0% per year, which until now has been positive and contributed to economic performance. The USD/JPY has ended the week appreciating +1.3%.
The British pound has reflected the market trends. Considering Brexit, the House of Commons on Thursday approved a plan to exit the European Union proposed by Prime Minister Boris Johnson, paving the way for a withdrawal on January 31 this year. It will then be followed by trade talks with 11 months until December 31, 2020, during which Britain will need to agree trade terms with the European Union. No important economic data was published in the country. GBP/USD has ended the week depreciating -0.1%.
This week will start with British economic data on the growth and industry output. Chinese international trade results are expected early on Tuesday, followed by U.S. inflation figures. On Wednesday, investors will be watching Britain’s inflation and European industry data. U.S. retail results are expected on Thursday, with a speech by Christine Lagarde, head of the European Central Bank. On Friday, Chinese indicators on economic growth, industrial production and retail sales, will be in spotlight.
According to Admiral Markets market sentiment data, 59% of investors have long positions in EUR/USD pair (increased +25 percentage points compared to last week). In the main Asian pair USD/JPY, 23% of investors have long positions (down 42 percentage points). In the GBP/USD pair, 49% of participants expect a rise (decreased -3 percentage points). Such market data are interpreted as contraindicative, suggesting appreciation in GBP/USD and USD/JPY pairs and depreciation in EUR/USD pair. Analysis of positioning data should always be accompanied with fundamental projections and technical analysis.