U.S. dollar has fallen to 2-year lows

Last week, the sentiment in financial markets was ambiguous. Among positive news was Brexit, when the European Union reached an agreement with the English negotiators. This provided a flash of optimism that the hard exit option was no longer in a range of alternatives. Among negative news was U.S.-China talks, with signs that China was not going to increase U.S. agricultural imports unless the U.S. cuts tariffs. The international trade conflict remains in deadlock.

USD

Economic data in the U.S. has disappointed expectations. Retail sales were the main focus, with annual growth of 4.1% and a slight slowdown, but a -0.3% drop over the previous month, the first negative since February. This has prompted speculation among investors that this is perhaps the first sign that residents will be more cautious in raising their consumer spending. Industrial output declined -0.14% over the year, reflecting worsening sentiment seen in PMI indices. The number of new unemployment applications reached 214 thousand and remained stable in the lows of the cycle.

Euro

The main currency pair EUR/USD has reflected market optimism over Brexit, rising to the level of 1.117, the highest since mid-August. Economic data included European industrial production, which declined by -2.8% year-over-year in August, the 10th consecutive month in a row. European and German ZEW economic indices remained below -20 points and reflected ongoing negative sentiment among market participants. Actual inflation in Europe in September was just 0.8%, below both preliminary and market expectations. This puts the pressure on the central bank as the threat of deflation grows. EUR/USD closed at 1.2% over the course of the week.

JPY

The most important Asian pair USD/JPY changed slightly last week. Increasing to 109.0 in the early days, later it returned below 108.5. Economic news included inflation data and September price growth slowed to 0.2% per year. This increases the pressure on the central bank for domestic deflation, but it is interesting that bank members are not continuing to reduce interest rates to negative territory and increase quantitative stimulus. Interestingly, market analysts estimate that if the central bank does not increase the volume of its quantitative easing program, the bank balance will start to decline gradually by 2020, which may be another sign of changing long-term central bank policies. USD/JPY ended the week unchanged.

GBP

The British pound continued to appreciate, reaching almost 1.30 level, the highest since May. Prime Minister Boris Johnson has reached an agreement with European Union diplomats on a new exit project. For the most part, there was no change, with most of the negotiations on the border in Ireland. Despite the positive breakthrough, a vote in the English Parliament took place on Saturday, with a decision to postpone the vote on the new agreement and, in the meantime, to request an extension of the European Union's negotiations. Mr. Johnson opposed this and accompanied the letter requesting an extension, which had to be sent under a recent law, another letter, describing the situation and proposing not to extend the negotiation deadline. This week we will find out the position of the European Union. Economic data was somewhat disappointing as wage growth slowed and unemployment rose slightly. Annual inflation stood at 1.7% and retail sales growth was 3.1%. GBP/USD ended the week appreciating 2.6%.

Economic Events

The last week of the month will be quite calm and will start with Japanese exports data. U.S. home sales will be announced on Tuesday. No major announcements were scheduled for Wednesday. On Thursday, the focus will be on preliminary PMI indices, as well as a meeting of the European Central Bank to decide on interest rates and further monetary policy. German Ifo Business Index and U.S. Michigan Consumer Confidence Index are scheduled for Friday.

According to Admiral Markets market sentiment data, EUR/USD long positions are held by 15% of investors (dropped -10 precentage points, compared to last week's data). In the main Asian pair USD/JPY 35% of investors hold long positions (increased +8 percentage points). In GBP/USD pair 27% of participants expect growth (decreased -19 percentage points). This kind of market data is interpreted as a contraindicator, therefore appreciation is likely in EUR/USD, GBP/USD and USD/JPY pairs. Analysis of positioning data should always be accompanied by fundamental projections and technical analysis.

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

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