MARKET REACTION TO TRUMP’S BORDER SPEECH AND LOOMING FOMC MINUTES.

Donald Trump

The mood across financial markets remained positive this morning as investors shrugged off Donald Trump’s Oval Office speech on border security to remain focused on ongoing trade developments.

A sense of optimism over trade talks between the United States and China ending on a positive note is clearly supporting global risk sentiment and this continues to be reflected on global equities. Although a breakthrough deal between both sides seems premature, any encouraging signs of cooperation and prospects of talks leading to more high-level negotiations will be a welcome development for financial markets.

While global stocks are likely to benefit from the risk-on sentiment in the near term, rising geopolitical risks are poised to create headwinds down the road. With little progress seen in resolving the partial US government shutdown and Donald Trump’s speech on immigration compounding uncertainty, the many ingredients for a selloff across markets seem to be in place. An unfavourable situation where trade talks defy expectations by concluding on a sour note is poised to trigger risk aversion – ultimately placing riskier assets including equities in the firing line.

In the United Kingdom, the Pound remains at the mercy of Brexit noise and the ongoing parliamentary debate over the Brexit deal ahead of the meaningful vote on January 15. Uncertainty over the nature of Brexit continues to cloud the Pound’s outlook with investors waiting on the parliamentary vote for direction. Whatever the outcome of the vote, it will certainly have a lasting impact on Sterling. On the macroeconomic front, Bank of England Governor Mark Carney will be in the spotlight later today discussing the future of money at the Bank of England Future Forum. Carney is likely to choose his words wisely during the Q&A session on the back of Brexit uncertainty and drama in Westminster.

The story defining the Dollar’s weakness in recent days continues to revolve around dovish comments from Fed Chair Jerome Powell and speculation over the Fed taking a pause on rate hikes this year. With Powell stating that the Fed “will be patient” and flexible towards raising rates, investors simply interpreted this as the Fed taking a pause on monetary tightening this year. Although December’s impressive jobs report eased fears over the health of the US economy, the Dollar remains at risk of weakening further if future data disappoints. The Dollar is seen having a muted reaction to this evening’s FOMC meeting based on the fact that it could be slightly dated when compared to recently dovish comments from Powell. In regards to the technical, the Dollar Index is under pressure on the daily charts. Sustained weakness below 96.00 is poised to open a path back towards 95.50 and 95.25, respectively.

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