A brief intermission

Today's news headlines:

‘Trump’s China handshake lifts spirits but not sober outlook’. On Friday, China agreed to increase its purchases of US agricultural products more than two-fold, while the US decided to prevent this week’s scheduled tariff increase. While it appears that trade tensions are easing, investors are doubtful since previous attempts to come to a resolution haven’t lasted long. Market strategists do not expect pressures to fully abate anytime soon. (Bloomberg)
‘Trump says “ready to go” on Turkey sanctions as troops leave’. The Trump administration has threatened ‘powerful’ sanctions on Turkey following its invasion into Syria. On Sunday, the Treasury Secretary said: ‘These sanctions could be starting small, they could be maximum pressure which would destroy the Turkish economy.’ Despite the aggressive rhetoric, Secretary of Defence Esper claimed ‘We are not going to war, another war in the Middle East, against Turkey’. (Bloomberg)

The other shoe drops

On Friday, our commentary attempted to contextualise upcoming Brexit risk and demonstrated that the risk of Sterling devaluation wasn’t gone, but has simply been pushed out into 2020. For a little while, the optimism of a potential deal was really moving the Pound higher, but it hasn’t lasted. Over the weekend, Jean-Claude Junker commented that conversations are continuing, but the proposal discussed by PM’s Johnson and Varadkar wasn’t sufficient to form the basis of a divorce deal. So with two weeks to the third Brexit deadline, we appear to be back to square one.

The proposed Brexit deal came out of nowhere, but the Chinese trade delegation’s arrival in the US was greatly anticipated. Speculation about the potential for this meeting to resolve the trade dispute has only been rising, particularly the more substantive issues like intellectual property protection, curbing state subsidies and trade enforcement. Donald Trump is confident that he can get a comprehensive deal through, but last week the Chinese said no substantive issues were on the table for negotiation. We’ve heard that a ‘partial deal’ has been agreed but have no idea what that covers and, more importantly, where it leads next.

Bottom line: There have been so many false starts and disappointments with the trade dispute and Brexit, that its surprising markets haven’t learnt their lesson. Today is a US bank holiday and so likely to be quite quiet, but the drama will resume tomorrow.

GBP/USD

Sterling’s rally at the end of last week pushed the pair to four-month highs of 1.2707 on optimism that a Brexit deal can be achieved before the October deadline. On the Monday open, Cable dipped back below the 1.26 figure amid emerging comments over the weekend that there is still a long way to go. Intraday volatility should be expected as further headlines appear.

GBP/EUR

The Pound continues to be the main driver of the pair as news on a Brexit deal trickles into the market. Last Friday, the pair climbed to 1.15, but trading in the London open brought the pair back to the low 1.14 level as the Brexit hype subsides. With the Euro still trading with low volatility and a light data calendar today, Brexit news is likely to keep steering the pair.

EUR/USD