The U.S. dollar rose to 2-month highs
Last week, investors remained cautious and tended to buy U.S. dollars, whose value peaked since early December 2019. There has been no major change in the political arena and the market was led by a general risk sentiment among market participants.
U.S. economic data was relatively positive. Preliminary manufacturing PMI index, released Friday by Markit, showed a decline from 52.4 points to 51.7 points, but remained within the expansion area. Existing home sales in December were 5.54 million units a year, above analyst expectations of 5.35 million. Overall, the residential market is showing recovery, following a slowdown in early 2019, as lower interest rates and rising house prices have boosted buyer activity. The number of new unemployment applications reached 211 thousand and was relatively stable compared to last week.
The main currency pair EUR/USD reflected the appetite for market risk and thus recorded a slight depreciation. Christine Lagarde, head of the European Central Bank, said at a press conference that members see further economic growth in the Old Continent, but voiced doubts about the rate of inflation, which remains slightly above 1.0% and is lagging behind targets. The head of the central bank also spoke about the internal review of monetary targets for the first time since 2003. Ms. Lagarde said a specific date by which a decision would have to be made is not yet available and the necessary market analysis is being carried out. A meeting of bank members was held on Thursday, but monetary policy and interest rates remained unchanged. Among the economic data, the preliminary manufacturing PMI index was 47.8 in Europe and 45.2 in Germany, showing improving sentiment among business participants. The ZEW Economy Index was also released, rising to 25.6 in Europe and 26.7 in Germany, which sent the most positive sentiment from the end of 2015. EUR/USD pair closed weekly trading depreciating -0.6% during the week.
The key Asian pair, USD/JPY has depreciated, driven by investors’ demand for safe assets as market participants chose the Japanese yen. Higher-than-normal demand has been triggered by the outbreak of the Corona virus in China, as investors became worried about a possible larger-scale epidemic and its impact on economic growth. The Bank of Japan held a monetary policy meeting, but the interest rate and the stimulus program were unchanged. Economic data included the country’s export volume, which declined 6.3% over the year, reflecting a slowing industrial sector. The preliminary manufacturing PMI index increased from 48.4 to 49.3, but remained in negative territory. December inflation stood at 0.8% per year. USD/JPY has ended the trading week depreciating -0.8%.
The British pound depreciated slightly against the U.S. dollar. There was no major political news. Among economic indicators, there was preliminary manufacturing PMI, which rose to 49.8 points, while wages increased by 3.2% per year, reflecting good market conditions, especially when unemployment is barely 3.8%. GBP/USD has ended the week appreciating +0.5%.
This week will begin with Germany’s Ifo Economic Sentiment Index, followed by new U.S. home sales. U.S. industry order results and consumer confidence index will be released on Tuesday. On Wednesday, the focus will be on the U.S. central bank meeting and interest rate decision. Bank of England will hold a meeting on Thursday, while Japanese industry data and a Chinese managers purchasing index will be released on Friday.
According to Admiral Markets market sentiment data, 79% of investors have long positions in the EUR/USD pair (increased +7 percentage points compared to last week). In the main Asian pair USD/JPY, 52% of investors have long positions (up 32 percentage points). In GBP/USD, 47% of participants expect a rise (down 8 percentage points). Such market data is interpreted as contraindicative, therefore appreciation is likely in GBP/USD pair and depreciation in USD/JPY and EUR/USD pairs. Analysis of positioning data should always be accompanied with fundamental projections and technical analysis.