- Rates: European reflation trade if Brexit hurdle is removed?!
The EU and UK are supposedly close to draft Brexit deal. The litmus test only comes in UK parliament this weekend. However, hope of a deal lifts European reflationary spirits. The German 10-yr yield settled above -0.41% resistance. US eco data, Q3 earnings and central bank speeches are wildcards. - Currencies: EUR/USD nears 1.11. Sterling needs confirmation on Brexit approval
Investor hopes on a Brexit deal and soft US retail sales propelled EUR/USD higher in the 1.10 big figure yesterday. The approval of a Brexit deal is no done thing, but soft USD data might continue to support the EUR/USD bid. The (perceived) chances on the approval of a Brexit deal will also determine the fate of sterling going into the weekend
The Sunrise Headlines
- WS drifted lower (up to -0.30%) as investors digested earnings reports and an unexpected drop in retail sales. Asian markets are trading mixed amid uncertainty over Brexit, trade, Hong Kong and Syria. HK outperforms (+0.6%).
- EU and UK negotiators seem on the brink of a Brexit deal before the start of the EU summit today. Yet, there are still plenty of hurdles for Boris Johnson to tackle as he needs the DUP to back his newly crafted deal.
- US and Chinese trade negotiators are working on drafting a Phase 1 trade deal text for president Trump and his Chinese opponent president Jinping to sign at the annual AMEC summit in Chile next month.
- General Motors and the United Auto Workers union leaders have reached a tentative agreement for a new labour deal clearing the way for an end to the costly month-long strike.
- Australia’s labour market tightened in September as the economy added 26.2k full-time roles while unemployment and underutilization both fell. The healthy jobs report will potentially give the RBA some breathing space in its easing cycle.
- According to the Fed’s Beige book, the US economy expanded at a ‘slight to modest pace’ since the previous report, with deterioration in manufacturing and agriculture and many businesses lowering their outlook for the next year.
- In today’s economic calendar markets will shift their focus to the start of the EU summit which will be dominated by last-gasp efforts to seal a Brexit-deal. Several US eco data will be published and a lot of central bank speeches are due
Currencies: EUR/USD Nears 1.11. Sterling Needs Confirmation On Brexit Approval
EUR/USD nears 1.11. Sterling rally to slow?
The euro initially tried to make some further headway yesterday on the hope of a Brexit deal. However, soon it became clear that it won’t be easy for PM Johnson to find a majority in Parliament. The EUR/USD rebound stalled. US retail sales disappointed. The US-German interest rate differential narrowed. The dollar initially lost only modest ground, but further technical buying later finally propelled EUR/USD higher in the 1.10 big figure (close 1.1072 from 1.1033). A soft Fed Beige Book was slightly USD negative too. Brexit and/or soft US retail sales were unable to inspire a clear USD/JPY move. The pair closed at 108.76.
Overnight, Asian equities are trading mixed. Recent risk rally is taking a breather. The picture on Brexit and on the trade talks remains muddy and soft US data are a source of caution, too. The trade weighted dollar struggles not to fall below 98. USD/JPY stabilizes (108.75). EUR/USD maintains yesterday’s gain (1.1075). The Aussie dollar rebounds as decent labour data ease calls for more RBA action anytime soon.
Today, the USD reaction to US eco data (Philly Fed, housing data, production) might again be a bit asymmetrical with the dollar being more sensitive to a negative than a positive surprise as markets ponder the chance for an October Fed rate cut. Several Fed members will again give their view. Evidently, Brexit remains a wildcard. A deal looks possible, but markets probably need assurance that PM Johnson will find a majority before the euro/sterling relief rally can continue.
Last week, EUR/USD regained 1.10, but there were no follow-through gains. Yesterday, soft US retail sales and lingering hope on a Brexit deal allowed further EUR/USD gains. A Brexit agreement would remove a high-profile source of E(M)U uncertainty. Maybe, the dollar might also lose some further momentum ahead of the Fed October 30 meeting. The pair regaining the 1.1110 area would improve the technical picture.
Sterling trading faced conflicting signals on Wednesday. Apparently there’s quite a strong will between UK and EU negotiators to strike a deal, but it still looks difficult for PM Johnson to find a majority at home. Yesterday, hope on a deal prevailed, pushing EUR/GBP to the 0.86 area. Today, markets might give more weight on headlines regarding the approval of the deal in the UK. In this context, a halt in the sterling rally, or even a limited sterling correction/decline is possible.
EUR/USD trending higher on Brexit hope and soft US data.
