Monday, February 11, 2019

The US-China trade talks will be the critical catalyst for the week ahead.

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MORNING BRIEFING

A busy week lies ahead with multiple issues at hand for investors to look for opportunities in the currency and equities' markets. The Brexit deadline looms close and Theresa May is making an effort to renegotiate a deal that will allow the UK to leave the EU in an orderly manner. At the same time, US Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer are flying to Beijing for talks with Chinese VP Liu He as US tariffs against China are about to be boosted. Equities ended last week in the red in Europe and the US markets were flat, Oil is testing the $52 level and Gold was boosted to $1,315.

The Pound trades above 1.29 at the beginning of the new week on the back of BoE interest rate decision and ahead of another effort from PM May to strike a deal domestically and abroad. The British currency has lost significant ground over the past 2 weeks as investors are growing increasingly worried on the prospect of a no-deal Brexit. In any case, May will try her best to make progress even though the EU side has made it clear that there's no room - or time for that matter - for renegotiation.

The fact that Sterling has held above the 1.29 support indicates that investors are still hoping for a positive resolution but at this stage this seems a far-fetched idea. However, a potential delay in Article 50's deadline is still possible - and quite likely given the lack of progress - and this is why market participants are still holding on their longs. Should May ask for a delay, this will prolong uncertainty but it will also make room for some kind of middle ground to be found and the Pound will benefit with 1.31 being the short-term target.

The Euro has also seen a significant decline during the past week and is now trading just above the 1.13 level. We have voiced our concerns about the Single currency's rapid ascent last month and we said that it was too fast to be sustained. Now that we've seen a hefty correction, the case of a stronger Euro over the course of the next few weeks is again put to the test. Whether the Euro will be able to bounce off the 1.13 area again depends on the manner that the GDP figures print this week and given the softer data seen recently the risk for the shared currency lies to the downside. A deeper correction will expose the 1.1270 level.

Dollar/Yen is testing the 110 figure once more being stuck in a consolidation for the past few days. The progress of the Sino-US talks and their knock-on effect on risk appetite will dictate the direction for the currency pair; signs of an impending agreement or at least a delay in boosting the US tariffs on China will help the Dollar to cross above 110. Otherwise, a breakdown in discussions will take a toll on US equities, which will in turn drive investors towards the safe haven Yen. A break below 109.60 will expose the 109 and 108.50 levels in extension.

Gold recovered at the end of last week and is now trading just above the $1,310 level. The yellow metal's short-term outlook hinges on the trade talks between the US and China and market participants' risk appetite in the face of the high-level meeting. Similarly to Dollar/Yen, a risk off tilt will increase demand for Gold and the target to the upside lies at the $1,325 area. Oil seems to be looking for a bottom currently trading around $52; short-term studies suggest a lack of further bearish momentum and we could be looking for a bounce towards $53 level today.

Equities had a bearish ending to last week's trading action with the European bourses closing in the red while the US markets were almost flat. This morning, futures on either side of the pond are mixed: Europe is pointing half a percent higher while the US is expected to open marginally lower. At this stage, investors care most about of the US-China trade talks and they will take their cue from any signs of progress - or lack thereof.

MARKET EVENTS TO WATCH

  • UK Gross Domestic Product - 1.30pm
  • UK Industrial Production – 1.30pm
  • UK Manufacturing Production - 1.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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