The week ahead: Trade talks, FOMC minutes and Brexit in focus
It has been a relatively
quiet start to another busy trading week, with stocks in Asia concluding higher
and European shares remaining steady amid gradual improved optimism over
potential progress in US-China trade negotiations. Although Wall Street is closed
today due to Washington’s birthday, global stock markets will be hoping for
more inspiration to push higher after President Trump tweeted that US-China
talks have been “very productive”.
We do think that while
reports of China and the US achieving a consensus in principle on major topics
is a welcome development for financial markets, it remains too early for any
celebrations. The clock is ticking fast on the end of the 90-day truce set late
last year, and it remains wishful thinking to carry optimism that there will be
a major breakthrough with a trade deal. The more likely scenario at this point
is that both sides could agree to another extension on the previous truce, or
that there is an extension to the March deadline for new China tariffs. A market-friendly
outcome to these long-standing tensions is still very much needed to boost
appetite for riskier assets.
Across the Atlantic, all
eyes will be on the FOMC minutes released mid-week that should offer further
insight into how ‘patient’ and ‘flexible’ the Fed is on future rate hikes. If
the minutes signal that US interest rates will be not increased at all in 2019,
the Dollar is at risk of being dethroned as the king of the currency markets.
The impact of last week’s disappointing retail sales report continues to be
reflected in the Greenback’s bearish price action today, with the Dollar Index
trading marginally below 96.70 as of writing. We see the Dollar weakness
becoming a major theme in the near term, as political risk in the United
States, disappointing domestic data and speculation of a pause in US monetary
tightening decrease the Dollar’s competitive advantage against its major peers.
Investors should fasten
their seat belts and prepare for a rocky ride on the British Pound, as Theresa
May heads back to Brussels this week for more Brexit talks. With the European
Union repeatedly stating that the Withdrawal Agreement is not open for
renegotiations, May risks flying back home empty-handed. It is interesting how
the Pound offered a muted reaction today despite several Labour MP’s resigning
over the Brexit drama. Traders are becoming increasingly unconcerned with the
endless political drama in the Commons, with some complacency over Brexit
possibly seeping in. The Pound seems to be supported by expectations over the
government extending Article 50 in an effort to prevent a no-deal Brexit.
Looking at the technical
picture, the GBPUSD is pushing higher on the daily charts with prices finding
comfort above the 1.2900 level. A solid daily close above this point should
provide bulls with enough fuel to journey towards 1.3000.
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