- Recent trade war developments exacerbate already-tense market sentiment
- Escalating US-China tensions could be a disincentive to an interim trade deal
- Dollar to be swayed by shifting outlook on US rates as investors await FOMC minutes, CPI release
- Pound to maintain downside bias as long as no-deal Brexit remains a possibility
Asian stocks followed their US counterparts lower, as investors grow increasingly concerned over an apparent rise in US-China tensions ahead of the high-level trade talks in Washington. So far this week, the US administration has issued travel-visa bans on Chinese officials, while placing eight major Chinese tech companies on a blacklist. Such developments are amplifying the already-tense sentiment in the markets, as investors eagerly await the outcome from the US-China trade negotiations in the coming days.
Recent events surrounding US-China ties threaten to raise new points of conflict beyond just trade differences. A wider scope in this protracted conflict would only heighten the barriers to a meaningful reconciliation between the world’s two economic powerhouses, while prolonging its drag on the global growth outlook. Risk aversion shall continue being the de facto mode for global investors, which should bode well for safe haven assets, keeping gold above $1500.
FOMC minutes and September US CPI release could sway Dollar, Fed rate outlook
The Dollar index is set to face two potential catalysts for near-term moves – the US CPI print and the FOMC minutes. With Fed chair Jerome Powell having recently indicated his preference for inflation to run a little higher, such comments appear to pave the way for another reduction in US interest rates. An October Fed rate cut has already been priced in, as investors remain on the lookout for more signs indicating another 25-basis point cut in December.
Overall, the Dollar is expected to remain resilient for the rest of the year, with investors flocking to safe haven assets amid a deteriorating global economic outlook. Barring a rapid weakening of global economic headwinds, the Greenback is likely to maintain its appeal as the US economy fares better compared to its peers.
Pound’s near-term gains to be transient as long as no-deal Brexit remains a possibility
The Pound is looking to break through 1.22 support against the US Dollar, following reports that Brexit talks are falling apart. With just three weeks remaining before the October 31 deadline, markets cannot yet fully rule out a no-deal Brexit. The likelihood of such a cataclysmic event is deterring traders from sending Sterling significantly higher.
Using the glass-half-full perspective, some segments of the markets are still holding out hope that a no-deal Brexit could yet be averted. Prime Minister Boris Johnson’s willingness to let the UK crash out of the EU without a deal at the end of this month appears to be mitigated by Westminster’s efforts to prevent it from happening. The ever-fluid Brexit saga is expected to leave the Pound exposed to politically-driven bouts of volatility over the coming weeks.
