14th October 2019 - Cautious optimism ahead of EU Summit

Walid Salah Eldin

Active member
The progress of US-China trade negotiations could boost the risk appetite sending the gold down and UST yields up, while the worries about reaching a Brexit deal before the end of this month could return again before next EU summit this week sending GBP down in the beginning of this week.

Both of US and China accepted the current possible proposals to cap the negative consequences of this trade war by halting the exchange of imposing further tariffs freezing the current ones as they are without rolling any of them back.

US equities indexes future rate could score further progress during the Asian session, while UST 10yr is still able to maintain what it gained by last weekend standing now near 1.73%, amid optimism about the US-China trade negotiations which ended to partial deal can be signed next month as President Donald Trump said.

The gold lost upside momentum by the end of last week to dive to $1473 per ounce before bouncing up to stabilize currently near $1485 per ounce, as the interest rate outlook is still forming reasonable support to it to be buoyed again.

The partial trade truce between US and China touched the top of the investors' hopes currently by capping the exchange of imposing further tariffs between the two biggest economies.

Trump will not increase tariffs on Chinese exports valued $250b this week as what was scheduled, after he could have promise from China to import large agricultural products from US.

In the same time, he is still keeping his pressure on china to cap the intellectual property thefts and raise up The Yuan exchange rate.

USD-CNY has risen above 7 since last AUG. 6 when the 2 countries decided to change further tariffs and now, it is trading near 7.05 following this deal outlines announcement, after it was trading close 7.15 level since the beginning of this month.

Trump could press on the Chinese side by listing number of Chinese technology firms on a blacklist to hold them back from dealing with US a day before that talks and he announced that he is moving ahead with discussions for restricting the U.S. government pension investments into China.

Trump looked eager more than before in reaching a deal even it is "a partial deal" he was ruling out to cap the economic and political woes around him.

After the impeachment calls from dropping him down and the manufacturing spectacular weak data of last September which have shown US ISM Manufacturing index deterioration to 47.8 in September to record its lowest level since July 2009, after 6 consecutive monthly slippages since reaching 55.3 last March.

This steep contraction of manufacturing sector which accounts for nearly 12% of the US economy and 8% of the labor market has been followed by the release of Sep US ISM non-Manufacturing index which has fallen to 52.6 from 56.4 in August, while the median forecast was pointing to retreating to 55.1 only.

The weakness in manufacturing can spill further into services sector and these cannot be "fake news"!

Oil could be boosted by the partial trade deal reached outlines and OPEC Secretary-General Mohammad Barkindo comments after meeting Alexander Valentinovich Novak Russian oil minister that members and allies will do whatever it takes to prevent further oil slide slump on the global economic weakness.

From its side, US announced that it is ready to take from its inventory to offset the shortage of the global oil supplies resulted from the attack on the Saudi Aramco company which halted half of the Saudi production and caused 1.5m bpd supply shortage last month.

WTI could rise to be traded close to $55 following his comments but now it is easing down for trading near $54.25 per barrel in the beginning of this new week.

The hopes for reaching a Brexit deal by this month could also add to the investors' risk appetite by last weekend sending GBP up across the broad underpinning the demand for British and European equities.

U.K. Prime Minister Boris Johnson tried to be easy as much as he could in his key talks with the Irish PM Leo Eric Varadkar to change his stance anyway and he could drive him to say that there may be a possible “pathway” for a Brexit deal but he refrained from offering final word about conditioned Brexit he can accept over time.

From the European side, EU's Chief Negotiator Michel Barnier could have also announced signal from the EU countries to be flexible as much as he can for reaching a deal to avoid hard Brexit damage.

But the realized change of Barnier's stance until now is that he was telling that there is no reason yet to optimism about a possible solution to the Irish backstop issue and now he is "optimistic".

The EU's Tusk set last Friday as a deadline for a breakthrough and during the weekend EU negotiators warned that Brexit plans from U.K. Prime Minister Boris Johnson are not yet good enough to be the basis for an agreement.

While Merkel is still asking for UK's acceptance for keeping Northern Ireland inside the EU's customs union and Johnson is still telling that a deal is impossible at this juncture.

The British pound will be in sake next for tangible deal not just an optimism about a deal it became priced in.

Take Care

Have a good day

Global Market Strategist of FX-Recommends

Walid Salah El Din
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