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High hopes ahead of US-China trade talks, Turkey in a tight spot

Equities finished on a positive note in the US last night, as traders are optimistic about the trade talks between the US and China, which will resume on Wednesday. 

US stocks are so strong that the S&P 500 closed less than 1% away from its all-time high. It is almost like global equity traders are seeking out quality stocks to invest in. The US government is in a better bargaining position than China, and traders are aware of that. It is worth remembering that the talks may come to nothing, and seeing as the Beijing authorities are encouraging banks to lend to exporters, it would suggest that the Chinese are hedging their bets. Mr Trump said he has ‘no time frame’ in mind for the trade spat to be resolved, and it appears that dealers are more optimistic than the politicians.

European equities closed higher on the session too, but they are still underperforming their US counterparts. The currency crisis is still hanging over Turkey, as the revelation that S&P and Moody’s downgraded the nation’s debt rating got traders wondering if individual Turkish banks could be in line to be downgraded next. Should that be the case, that could be the catalyst for a move lower in the euro and or eurozone banks. President Trump will keep his tough stance against Turkey, and won’t make any concessions for the release of US pastor Andrew Brunson, and this is likely to keep pressure on Turkey too.  

Moody’s will carry out their review of Italy’s debt rating by October. In the grand scheme of things, Italy has the potential to be a much bigger problem for the eurozone than Turkey. The European Central Bank can only buy investment grade bonds for their stimulus package, and should Italian debt be classified as ‘junk’, it could spark a sell-off in Italian government debt, and in turn drive up their borrowing costs.

The US dollar dipped yesterday after President Trump criticised the Federal Reserve for hiking interest rates. Mr Trump announced that Jerome Powell, the head of the Fed, should do what’s ‘right for his country’. President Trump accused China of manipulating their currency, and the same goes for Brussels. It would appear that Mr Trump would like to keep the US dollar a little on the weak side in order to remain competitive.   

Given the US dollar has been in demand recently on account of the geopolitical issues and the Fed’s monetary tightening policy, Mr Trump might find it difficult to talk the greenback lower. Raphael Bostic, Atlanta Fed president, foresees further monetary tightening even though there is downside risk given the state of global trade.  

It will be a relatively quiet day in terms of economic announcements. At 9.30am (UK time) ,the public sector net borrowing figures will be released, and the consensus estimate for July is a surplus of £2.3 billion, and that would compare with borrowing of £4.5 billion in June. At 11am (UK time) the Confederation of British Industry (CBI) industrial orders expectations report will be revealed, and the reading is tipped to be 9, down from 11 in August.

EUR/USD – now that it has broken above the 1.1500 region, we could see further gains, and resistance might be found at 1.1663. If the wider negative move trend continues, support might be found at 1.1287 or 1.1156.

GBP/USD – has been in a downtrend since April, and if the bearish move continues it could target 1.2590. Pullbacks might run into resistance in the 1.2957 to 1.3000 region.       

EUR/GBP – has been pushing higher since April and if the bullish run continues it could target 0.9050. A move lower might find support at 0.8900 or 0.8844. 

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 112.15. Support might be found at 109.87 – the 200-day moving average.

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