Friday, February 22, 2019

Progress in trade talks to spur risk sentiment, Pound remains resilient

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

Currencies and equities are trading flat towards the end of the week even though small signs of progress are seen in the Sino-US trade talks. US President Donald Trump plans to meet with the Chinese top negotiator today according to several sources to wrap up this week's round of talks, suggesting that the two sides are finding some common ground. The Dollar traded flat versus its major counterparties, with the exception of the commodity dollars, which means that traders need more evidence of progress before going on a risk-on mode. Gold extended its retreat while Oil consolidates around the $57 mark.

Small signs of progress in the trade negotiations between the US and China is the key takeaway from this week's round of talks. Risk sentiment has improved somewhat with Treasury yields notching small gains as investors grow a bit optimistic about an improvement in trade relations but these gains are yet to be transmitted to the currencies and equities' space. Apart from the Euro and the Pound that have their own domestic issues holding them back, Dollar/Yen held steady around 110.60-80.

There's still one week to go before the US is supposed to impose higher tariffs on Chinese goods and risk sentiment will depend on whether this takes place or the US' side defers at this time. Given that enough headway seems to have been made to warrant a meeting between Trump and the Chinese negotiator today, it appears more likely that the US will not raise the levies, which should help high beta currencies and equities push higher. If things play out in this manner, Dollar/Yen will look to drive above 111 and towards 111.50 in extension.

The Pound held steady over the past 24 hours even though Theresa May's meeting with Juncker yielded no progress in breaking the deadlock. As discussed yesterday, the only reason why the British currency is holding up that well is because traders are pricing in a request that Article 50's deadline is extended. According to the Telegraph, 100 Tory MPs are ready to rebel in order to force Theresa May to ask for an extension, which should be no more than 3 months to avoid the UK taking part in the European elections. Should May request this extension it will most likely be granted and it will take Sterling higher as a no-deal exit would be avoided, at least for now. In that case, an immediate rally to 1.32 seems the way forward.

Gold retreated yesterday as expected due to the progress seen in the US trade talks. We had called for a correction towards the $1,332 area but the decline took prices to $1,325 after the news of an upcoming meeting between Trump and the Chinese side hit the wires. The $1,325 support is now being put to the test and if prices continue trending lower then a further retreat towards $1,315 will be the next step, where the medium-term ascending trendline will also be challenged. Oil came close to hitting $58 yesterday but eventually settled just above the $57 mark; the momentum seems to be slowing down after several days of gains but as long as Oil holds above $56 then we're still optimistic of hitting the $58 mark.

Global stock markets ended the day in a mixed manner yesterday, with the EuroStoxx 50 seeing a small advance while the FTSE 100 ended the day lower. The US markets were mostly in the red closing around 0.4% lower in average. This morning though the news that the US President will likely meet with the Chinese top negotiator to wrap up a positive round of talks is propping stocks higher. Futures on either side of the Atlantic are pointing higher so if the meeting takes place in an amicable mood, equities will end the week on a positive note.

MARKET EVENTS TO WATCH

  • German IFO Current Assessment - 1pm
  • German IFO Expectations - 1pm
  • Euro-Zone Consumer Price Index - 2pm
  • ECB President Draghi Speaks in Bologna, Italy - 7.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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