The high-profile trade talks between US and Chinese negotiators are still to yield any progress, and given the generally downbeat economic outlook, there seems to be a general absence of good news right now. German Industrial Production data and a slew of Eurozone confidence readings all fell short of expectations yesterday, while the World Bank has also produced a gloomy assessment for developed markets. The only sign of optimism was far more aggressive borrowing by US consumers in November, although this has the potential to present further challenges for the Dollar should the US economy tip into recession.
The key news to watch for in the hours ahead is arguably word from the trade negotiators in Beijing. Talks were extended to a third day but according to reports, are currently being wound up. Any progress is likely to be well received and have the ability to drive risk sentiment, in other words providing cause to sell down the US Dollar. It’s this broad-brush assessment of avoiding further tariff hikes in March—rather than the details of any deal—which is likely all the market will want to determine the outcome has been successful, at least in the short-term.
The Eurozone Unemployment Rate figure for November is set to be published at 10am GMT today. The common currency is still struggling to regain losses from Monday night’s bout of selling; the Euro was also beaten down by a shocking shortfall in German Industrial Production. The ongoing political stand-off in the US may be lending some support, but EUR/USD remains below recent highs. Again, any suggestion that the European Central Bank (ECB) is acting too hastily over its bid to normalise monetary policy could see some downside pressure being applied to the common currency.
Rebel MPs in London yesterday managed to block the government’s post-Brexit tax-raising powers if the country leaves the EU with no deal in place. However, this was brushed off by the Prime Minister’s office as a minor incident, although it does show the increasing disquiet with the current strategy which is being deployed. As next week’s pivotal vote looms, the risk is that further downside pressures will be seen for the Pound.
There was some heightened volatility seen during last night’s session, with the GBP/USD pair jumping around half a cent in a matter of minutes; although, again this was seen during the lull after US markets closed. With traders struggling to trade the currency right now given Brexit uncertainty, volumes will remain thin and errant moves like this have the potential to become increasingly common in the week ahead.
The Euro may be finding some incremental gains over the US Dollar, but they are proving difficult to build on. Concern that the Fed may not be as dovish as some thought earlier in the week is limiting upside here, although positive developments from the China/US trade talks could lend fresh support.
The Pound has seen some selling against the Euro in recent trade, with Brexit uncertainty a key driver. However, the cross does still sit a significant distance above recent lows, so there’s still the potential for further bouts of selling to follow.