Yesterday, Donald Trump indicated that a post-Brexit trade deal between the US and UK could increase trade by ‘two and even three times what we’re doing now’. The US President also stirred up some controversy by hinting that the UK’s NHS could be opened up to American companies, before reversing his position in an interview with ITV. Trump has aligned himself with some of the more Eurosceptic Conservative MP’s to encourage a clean split from the EU. This would pave the way for a wide-ranging deal without the ‘EU’s shackles’. Is the US President a reliable trade partner though? Trump has a history of demanding big concessions and the NHS could definitely be brought back to the table on a whim.
Bottom line: A major UK-US trade deal would offset some of the lost commerce with the EU following Brexit. This is certainly a positive factor to focus upon, instead of the usual Brexit calculus, which always seems to end up in a reduction of UK trade.
Wherever you look, you see signs of a global growth slowdown. This morning, the World Bank has trimmed its 2019 Global Gross Domestic Product (GDP) forecast by 0.3%, due to trade tensions. The yield curve has been inverted—short-dated US treasury yields exceed long-dated treasury yields—for some time now, which implies that markets anticipate lower rates to support the economy. Over the past week, two key Fed officials, Bill Dudley and Richard Clarida, have both expressed a willingness to reduce rates or ‘look through’ temporary inflationary factors. Last night a third voice sang a similar song; Chairman of the Federal Reserve, Jerome Powell, mentioned he is ready to step in to support the central bank’s employment and inflation mandates, citing trade as a particular concern. Risky assets which have been sold for the past week or more have rebounded on this supportive news. From one perspective, at least this is good news because it evidences confidence in the central bank’s capacity to prevent a recession. However, the sheer breadth of negative economic data releases tells a different fundamental story.
Bottom line: It looks like the Dollar sale/Euro appreciation yesterday was the beginning of a risk-on trend. This morning, Sterling has joined the common currency and started moving higher for the first time in nearly a month.
The pair seemed to have bottomed yesterday, and we’ve seen further positive momentum this morning. A fall in the Chinese Services PMI (Caixin) has largely been ignored in favour of the more upbeat EU PMI data releases. It might be accurate to say this is an unwinding of the previous pessimistic stance and is less data dependent than it appears on the surface.
The Euro’s appreciation has been more tangible than the minor Sterling uptick. Not surprisingly, this pair has been in decline but might find support depending on whether the Pound gains favour.
This has been the big mover of the week with the Dollar and Euro moving in opposite directions. The momentum of the Dollar sale seems strong given the dovish Fed speeches, so there might be more to come.