Market News & Insights
17 September 2018

Absence Makes the Heart Grow Fonder

Trade talks will continue to headline this week’s calendar. With 193 days to go, Brexit negotiations look to have moved into a new decisive phase with all parties agreeing a ‘hard Brexit’ must be avoided. Angela Merkel of Germany commented on Friday that she wanted the EU to have a close relationship with Britain after Brexit and that everything should be done to ensure the UK leave the EU with an agreement in place. Over the weekend May got an added boost with the backing of two important Brexiters in Liam Fox and Michael Gove. This softening stance should give a boost to the pound in the short term, with the next 8 weeks key for the medium to long term outlook for sterling. This week’s European summit will be the first time since June that EU leaders have sat down to discuss Brexit. While we have seen a lot of positivity around the prospect of a deal, it is important to remember that “the hunger games” is by no means over, and this week’s statements from both parties on the process of an agreement will be key.

Last week’s BoE’s minutes reinforced the central banks reservations on the uncertainty around Brexit. Stating that the greater clarity on trade negotiations was needed when assessing further monetary policy decisions. Markets pushed back their expectations of a rate hike by the central bank into the latter part of next year on the back of the minutes. However the latest IHS Markit Household survey showed 49 percent of people expect the BoE to raise rates in the next 6 months, with 73 percent expecting an increase in the next year. This surprising positive outlook helps highlight the discrepancy between the markets and general public’s optimism around Brexit.

The other major trade war between the US and China is also expecting to pick up this week. The US are expected to unveil fresh tariffs on $200 billion of Chinese goods. These tariffs which could be imposed as early as today are expected to be about 10 percent, which is below the 25 percent level which had been originally cited. Markets now see a 1-in-4 chance of a full blown global trade war that could lead to a hard landing in China and result in a global recession.

In today’s economic calendar where the euro will be in focus as the Eurozone will release the final CPI reading for August. The consensus estimate is 2%, and the preliminary report was 2%. EURUSD broke the 1.17 level briefly on Friday but quickly retreated back to below 1.1650 where it finds itself now. EURGBP continued its reversal and opened under .89 this morning.