The precarious balance of power

Today's news headlines:

‘Johnson talks up a Brexit deal as he heads for Juncker meeting’. UK Prime Minister Boris Johnson is optimistic about reaching a Brexit deal ahead of his first negotiations with European Commission President Jean-Claude Juncker on Monday. The PM wrote in an article in Monday’s Daily Telegraph: ‘I passionately believe I can strike a Brexit deal within weeks’. (Bloomberg)
‘Trump vows US “locked and loaded” if Iran was behind attacks’. Donald Trump has warned that the US is ready to act if Iran is responsible for the attack on major oil facilities in Saudi Arabia. US officials are claiming they have substantial evidence that Iran carried out the attacks, despite Iranian-backed Houthi rebels in Yemen claiming responsibility. (Bloomberg)

We were having such a good time…

Donald Trump and Xi Jinping were making nice; market participants were crawling out from cover like the Christmas Truce of 1914, playing football in no-mans-land; and then over the weekend, a Saudi Aramco facility was struck by a drone attack which US Secretary of State, Mike Pompeo, attributed to Iran. The main market benchmark of oil prices, Brent Crude, jumped by nearly 19% and reached $72 per barrel. Fortunately, the productive capacity of the facility can be brought back to full speed in the next day or two, which caused the price to settle at a more reasonable $66 per barrel, a 10% gain on Friday’s close price. With the renewed rise of US-Iran tensions, the higher resulting oil prices is a clear-cut drag on global growth and piles pressure onto the trade talks.

As if it weren’t enough, last night, China released the second-worst year-on-year Industrial Production and Retail Sales figures on record. While this is clearly bad for the Chinese domestic economy, it may ironically also be bad for talks. There is a risk that the Trump administration may perceive the Chinese to be in a weaker negotiating position and overplay its hand. Anything that upsets the precarious balance of power between the world’s leading economies threatens to derail the progress made thus far.

Bottom line: This weekend’s events have halted the Dollar’s decline and Sterling/Euro ascent. In fairness, this is a quiet data day from an economic data perspective, so news headlines were destined to drive action today. Tomorrow the ZEW Economic Sentiment survey will have pride of place and is likely to pivot the growth story to the Eurozone, where some improvement is expected after last month’s dramatic decline.

GBP/USD

Sterling’s recent rally may run out of steam this week as its trade-weighted index reaches the 200-daily moving average. Today, British PM Johnson will begin Brexit negotiations with the EU, meaning the pair will be vulnerable to headlines that shift Brexit sentiment.

GBP/EUR

The pair was largely driven by Sterling movements last week, and with key Brexit negotiations beginning this week, the trend is likely to continue. In overnight trading, the pair traded just shy of 1.1300—a level that may be of key resistance in the short-term.

EUR/USD

The pair managed to hold onto gains following last week’s monetary easing by the European Central Bank. Monday’s open is flat for the pair, and with little in the way of data, a flat trading session may persist throughout the day.