Sterling Pauses on Reports of Leadership Challenge

China using Russia to get at the US as trade tensions rise

US futures are trading relatively unchanged ahead of the open on Wednesday, taking the lead from Europe where markets have been quite calm early in the day.

It’s been an uneventful day in financial markets so far, with only low level data being released and no major political stories causing a stir. This is likely to just be a temporary lull as tempers continue to flare between the US and China, with the latter using its relationship with Russia to send a message that there’s more than one way to win a trade war.

With China involving the WTO in the dispute and the US preparing more tariffs – and threatening an eventual tariff on all imports – it doesn’t appear this threat is going away any time soon and is something we should just get used to. This could work to the advantage of the EU with Trump engaging in negotiations in an attempt to forge closer trade ties, remove barriers and eliminate the apparent need for new tariffs.

Asia risk continues to wobble (OANDA Trading Podcast 938Now)

Threat of leadership challenge weighing on sterling

The constant flow of Brexit speculation and reports are continuing to find their way into the media, something that is unlikely to change as we get ever closer to the deadline with a deal. Over the last couple of weeks that’s resulted in a lot of volatility for the pound with traders getting very excited at the release of anything that indicates a move away from the no deal scenario.

GBPUSD Daily Chart

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While I’m sure the pound would have plenty further to fall in the event of a no deal Brexit, a large amount of pessimism has been priced in now which may explain why we see such significant surges in response to relatively insignificant reports. Still, that is the current reality and it’s likely to see the pound remain in its volatile state for some time.

Working against these more optimistic stories has been reports of a leadership challenge with some of the more vocal Brexiteers in Theresa May’s own apparently plodding against her, dissatisfied with the direction negotiations are headed in. The threat of this has prevented the pound making further gains in recent days as its seen as increasing the chances of no deal Brexit or at least a harder one.

EUR/USD – Euro slightly lower as eurozone industrial production misses mark

BoE tomorrow likely to be uneventful

With the Bank of England decision to come tomorrow, the pound is not likely to be steady for long. The central bank isn’t expected to announce any changes tomorrow and will probably prefer to drift into the background as much as possible for the remainder of the year until a deal is reached but that won’t stop traders picking apart the minutes and looking for clues on the timing of the next rate hike.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

China to seek closer Russia ties as US eyes more tariffs

U.S. tariffs on Chinese goods are going to lead to a “substantial improvement” between China and its neighbor Russia, the former People’s Bank of China (PBOC) Governor Zhou Xiaochuan told CNBC Tuesday.

“From the economy’s (point of view) and the financial sector’s (perspective), we would like to have a normal relationship with the U.S.,” he told CNBC’s Geoff Cutmore at the Eastern Economic Forum (EEF) in Vladivostok, Russia.

However, he added that a massive package of U.S. tariffs on Chinese imports, instigated by President Donald Trump, has made China “look at other markets and to diversify our trade and business relationships.”

CNBC

China to ask WTO permission to impose sanctions on US

China will seek permission from the World Trade Organization (WTO) to impose sanctions on the U.S. next week, according to the WTO’s meeting agenda.

The request comes at a time of escalating trade tensions between the world’s two largest economies, with President Donald Trump saying last week he was “ready to go” on tariffs for another $267 billion on Chinese goods “if he wants.”

That would follow planned charges on $200 billion of Chinese goods in several industries, including technology. Beijing has vowed to retaliate if the U.S. takes any new steps on trade.

CNBC

GBP struggling for momentum despite strong data

Sterling plunges after initial post-data gains

The start of the European session has been dominated by data releases from the UK and euro area, with investors also keeping a close eye on trade developments involving the US, not to mention Brexit.

It’s been another volatile day for the British pound, which rose in the immediate aftermath of a decent jobs report for the UK before plunging despite there not being a clear trigger to warrant such a move. The jobs report itself paints a much better picture of the UK economy than many people generally have, with unemployment standing at 4% – the lowest since March 1975 – and wage growth nearing its highest levels since the financial crisis.

While these levels are still well below what we were seeing prior to a decade ago, they’re certainly supportive of the Bank of England’s policy of gradually raising interest rates when taken in isolation and the jump in earnings further aids this which is why we saw a bump in sterling. The flip side of this is the one-off factors that are likely contributing to the gains, rather than them being entirely organic and a result of a tight and competitive labour market, not the mention the uncertainty and risk with regards to the outlook.

Commodities Weekly: Gold short bets at highest in 17 years

The plunge in the pound shortly after has got people more interested though as there doesn’t appear to have been much of a trigger, despite the currency slipping from close to 1.31 against the dollar to briefly below 1.30. It has since stabilised somewhere in the middle which suggests there may be something to the move even if the initial drop may have been overdone. If no news surfaces, it will be interesting to see whether the pound regains the lost ground over the course of the rest of the session.

GBPUSD Daily Chart

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EUR edges lower despite better sentiment surveys

The euro has also been in gradual decline over the course of the morning in Europe. An improved and better than expected ZEW economic sentiment survey for the eurozone and Germany appears to have done little to halt the decline, which is potentially due to the fact that it continues to languish around multi-year lows despite this minor reprieve. The US engaging in a trade spat with the region and using its auto industry as the pressure point is not doing much to help confidence at a time when it already appears to be experiencing a slight slowdown.

EURUSD Daily Chart

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Another Brexit bounce

Brexit, US/China tariffs and US/EU negotiations remain in focus

Trade continues to be at the forefront of people’s minds at the minute, be that the risk of a trade war between the world’s two largest economies, potential deals between the US and EU as negotiations get underway or the future relationship of two allies after Brexit. The EU has stolen much of the focus this week, with Michel Barnier yesterday talking up the prospect of a deal on the UK’s exit from the EU in the next six to eight weeks which would avoid a damaging no deal Brexit scenario.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

OANDA Market Insights podcast (episode 26)

OANDA Senior Market Analyst Craig Erlam and Head of Trading Asia Steve Innes review the week’s business and market news with Jazz FM Business Breakfast presenter Nick Howard.

This week’s big stories: rate hike from the Bank of England, Apple market cap hits $1 trillion, China moves to shore up the yuan, and US job figures (non farm payroll numbers) miss expectations.

Big revisions offset July miss on payrolls

Another strong US jobs report expected today

The PBoC giveth the PBoC taketh

GBP/USD – Pares gains ahead of BoE

The sell-off in GBPUSD (cable) has been losing momentum for a couple of months now, with the pair having stalled around 1.30 despite one attempt to break below a couple of weeks ago, something that now looks like a false breakout.

The move has coincided with a general improvement in sentiment towards the greenback, with the already hot US economy getting an additional fiscal boost from tax reforms, leading to an increase in expectations for rate hikes in the near to medium term.

GBPUSD Weekly Chart

It has also coincided with a slowdown in other countries which has forced their respective central banks to take a more gradual approach to tightening plans, with the Bank of England being one of those to have adopted such an softening in stance.

The dollar has also benefited from its renewed safe haven appeal, with US Treasuries being favoured in trade-related risk averse environments thanks in part to the higher yield that is now on offer.

DAX trading sideways as eurozone inflation within expectations

This pair is not short of potential catalysts this week, with the BoE meeting on Thursday – or Super Thursday as it has now become known – being at the very top of these (Fed rate decision Wednesday and US jobs report on Friday also clearly stand out).

The UK central bank is widely expected to raise interest rates by 25 basis points at the meeting – 87% priced in – the second post-financial crisis rate hike but the first time rates will be above 0.5% which for some time was seen as the lowest they could reasonably go.

BoE Interest Rate Probability

Source – Thomson Reuters Eikon

While the decision to raise interest rates has been met with confusion and even criticism, due to the economy very much not firing on all cylinders and Brexit talks now at a crunch point and likely to be much clearer in only a few months, policy makers have done nothing to correct markets interpretation of events which if anything makes investors even more confident that it will happen.

This comes after policy makers backtracked on a rate hike in May due to the first quarter slow down, despite being confident at the time that it was largely weather related, something recent data has gone some way to confirming.

BoJ new script supports the carry-trade

This determination to raise rates may be one of the things supporting the pound recently but if a hike is so priced in, has sterling peaked? I’m not sure. For one, any progress in Brexit negotiations should be good for the pound. The same applies to the economy, with both providing comfort to the central bank. Something it can’t have much of right now given the sheer amount of uncertainty.

GBPUSD Daily

From a purely technical perspective, the sell-off appears to have potentially run its course. The pair has found support around a notable technical support level – 50 fib from lows to highs, previous support and resistance and a big round number just to complete the hatrick.

What’s more, upon reaching here, momentum had already started to decline and has continued to do so, with the MACD and stochastic making higher lows even as price made lower ones. This divergence, while not being a buy signal, is a sign that all may not be as bearish as it was and that there may be some profit taking or even buying creaping back in (remember, if this is a corrective move, then the recent weakness should prove only temporary and bulls become increasingly interested once again).

The pair may be flat on the day after US inflation, income and spending figures brought some life back to the dollar, but should it find some upward momentum again and break back above 1.32 – and the falling channel – it could be a bullish signal in the near-term.

Busy week in markets gets off to a slow start

Investors encouraged by Trump/Juncker meeting

Equity markets are trading slightly in the red in what has been a slow start to an otherwise very busy week in financial markets.

Stock markets have been gradually rising in recent weeks, making their way back to the record high levels they achieved earlier in the year before the numerous trade conflicts involving the US heated up. The apparent progress made at the White House last week between Donald Trump and Jean-Claude Juncker has eased some concerns for now but the threats generally remain.

Earnings season has delivered a positive distraction for investors, with companies once again reporting stellar quarterly results aided by the obvious benefit of tax cuts. We’ll get results from another 144 S&P 500 companies this week as US corporates look to continue the positive momentum of earnings season so far and potentially propel the index to a new high.

DAX ticks lower, German CPI next

BoE seen raising rates while Fed and BoJ also meet

There’s also a number of central bank meetings this week, the most notable of the lot probably being the Bank of England with investors widely expecting a rate hike, taking the benchmark rate above 0.5% for the first time since early 2009. A rate hike is now 86% priced in which could trigger a lot of volatility if policy makers once again hold off, as they did back in May.

BoE Interest Rate Probability

Source – Thomson Reuters Eikon

The Federal Reserve and Bank of Japan will also hold meetings this week although these events may be less eventful, with neither seen adjusting policy this month. The Fed is also on a very clear tightening path and with the economy performing in line with expectations and the trade conflicts not yet biting, I don’t expect there to be any change in the central bank’s stance.

G7 FX moves look to central banks for direction

There has been speculation that the BoJ may look to slightly remove accommodation by increasing the yield it will allow the 10-year to reach, although I’m not sure that will come this week. Investors appear to be testing the BoJ’s resolve, with the yield having hit its highest level since February last year. Should the central bank reject the speculation, I would expect this to quickly reverse course.

This week also sees the release of the US jobs report which is widely regarded to be the most important economic report of the month and is typically a trigger for market volatility.

Economic Calendar

 

For a look at all of today’s economic events, check out our economic calendar.

Russia Sells Off US Debt

The Russian government, previously considered a significant holder of U.S. debt, has been steadily — and sharply — paring down the vast majority of its holdings of U.S. Treasury securities.

Russian holdings of Treasury securities declined 84 percent between March and May, falling to $14.9 billion from $96.1 billion in just two months, according to a U.S. Treasury Department report released July 18.

Financial bloggers have pounced on the news as being potentially ominous, but a few analysts suspect the transactions are more closely related to Russia’s sanctions-hit economy, and portfolio allocation.

OANDA Market Insights podcast (episode 25)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: US/EU set for tariff deal, US GDP boost, Facebook shares plummet, Brexit blow for May.

Craig also previews the week ahead with interest rate decisions coming from the Bank of England, Federal Reserve and Bank of Japan, as well as the July US jobs report.

USD/JPY – Japanese yen gains ground on strong inflation report

U.S. Economy grew 4.1% rate in Q2

Easing trade fears provide boost ahead of US GDP

Easing Trade Fears Provide Boost Ahead of US GDP

Markets buoyed by easing trade war risks

European markets are trading in the green once again on Friday, with futures pointing to a similar open in the US, as an apparent easing in trade tensions between the US and European Union boosts risk appetite.

While only the outline of an agreement on trade between the two – which account for more than half of global GDP – was released, it was widely viewed as an important first step towards more cooperation and closer ties, and away from protectionism. For Donald Trump, the concessions offered by the EU represent an important victory at home ahead of the midterm elections – although the real benefits of them may not be known for some time.

Juncker on the other hand will be a relieved man, returning to Europe having avoided tariffs being imposed on the auto industry and with apparent assurances both sides will work towards removing those already imposed, while lowering other tariffs and non-trade barriers in the future. This was also ultimately the goal of Trump as well when imposing the tariffs so both will feel they have come out of this better off.

U.S dollar firmer on GDP expectations

Strong week of earnings despite Facebook horror show

Ultimately, the biggest winner here may be investors as the meeting now potentially sets a precedent for how other trade conflicts can be resolved, although the feud with Beijing is more complex and may take much longer to repair. The protectionist measures adopted by Trump as a tool to fight other countries on trade – and then by those countries in retaliation – have weighed on markets since the start of the year, keeping the S&P 500 and Dow off their highs despite companies having reported huge earnings growth – primarily driven by tax cuts – in the first two quarters.

It’s been a big week for earnings season, with a third of S&P 500 and Dow companies reporting on the second quarter. While the general trend has remained, with companies reporting strong figures, it hasn’t passed without its casualties, with Facebook closing almost 20% lower yesterday after reporting disappointing numbers and forecasts. Today is looking a little quieter on the earnings front, although there are still 18 S&P 500 companies reporting, including Exxon Mobil and Twitter.

US GDP eyed as Trump hopes for more than 4%

On the data side, the US will release GDP figures for what is expected to be a bumper second quarter after a modest first few months of the year. The economy is expected to have grown 4.1% on an annualised basis, which will naturally be championed by Trump as being rewards for his hard work. It will be interesting to see how markets react, should the economy outperform expectations, with the Federal Reserve already on course to raise rates twice more this year.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.