It was another positive day for global equity markets yesterday, as investors shrugged off the latest IMF growth downgrades for the global economy, instead choosing to focus on some decent numbers from US bank JP Morgan Chase among others, while Chinese officials more or less confirmed the US interpretation of the mini arrangement agreed between the two at the end of last week, with respect to a phase one deal.
The latest IMF report cited concerns that the ongoing disagreements between the US and China would continue to hang over the global economy in the coming months.
Investors also latched on to rising optimism that UK and EU negotiators might be close to a breakthrough in the latest talks over Brexit. All it took was the mere whisper that EU and UK negotiators might be on the cusp of a possible Brexit breakthrough to propel, not only the pound up to its highest levels against the US dollar since May, but also sent the German DAX to its best levels in over a year.
With all the problems facing the German economy at the moment, resulting in fears over a technical recession as it reels from the fallout from the trade war between the US and China, the worst thing that could happen is for there to be a disruptive Brexit on top of all its other problems as well.
Of course, all of this optimism over a Brexit deal could well come to nought, after all how many times have we been down this road in the last three years, as talks have faltered over the Gordian knot of Northern Ireland. Not only does any deal have to pass muster with the EU, it also has to get past Northern Ireland’s DUP, as well as MPs in the House of Commons, who have proved to be every bit as obstructive when it comes to rubber stamping a deal.
For now, while it would appear that financial markets are pricing in the prospect that a deal is in the offing, a lot can still go wrong in the coming days, and there are still a significant number of MPs in parliament who have little interest in trying to push a deal across the line, and would rather Brexit not happen at all.
With a deal so close and the EU summit this week, the lack of an agreeable text by today could mean that we get an extra summit next week in order that the necessary paperwork is finalised in time for the 31 October deadline. Even if it isn’t, it remains highly possible that a short extension could be granted in order to push a deal across the line.
As far as the UK economy is concerned, yesterday's unemployment data for the three months to August gave the first signs that the UK labour market may well be on the turn, as the unemployment rate edged back higher to 3.9%, though wages growth continued to hold up well, also coming in at 3.8%.
Even on the inflation front, prices appear to be going in the right direction; a decline in oil prices helped push headline CPI down to its lowest levels in nearly three years at 1.7% in August, while core prices dipped to 1.5%. Since then oil prices have remained steady despite a brief spike higher in the aftermath of the attacks on the Aramco infrastructure about a month ago. Today’s inflation numbers for September are expected to remain fairly steady, albeit with a slight tick higher to 1.8% on the headline number, with core prices also expected to edge back up to 1.6%.
The slowdown in the global economy appears to be having a chilling effect on prices, as well as demand, as a deflationary pulse ripples out from China, as a result of the slowdown there. This is also posing a problem for the European Central Bank which is also battling a weak inflationary environment, and where the latest CPI numbers are also expected to stay anchored near multi-year lows. Headline CPI for September is expected to be confirmed at 0.9%, with core prices at 1%.
EUR/USD – is still struggling to overcome the 1.1070 area and 50-day MA, which needs to break to kick on towards 1.1200. Intraday support comes in at the 1.0920 area and this needs to hold or we could see a move back to the 1.0800 level.
GBP/USD – surged through the 200-day MA and the 50% retracement of the 1.3380 to 1.1955, down move, punching through the 1.2720 level in the process. The next target sits at 1.2840, (61.8%) but having broken above trend line resistance from the 2018 highs there is a good chance we could well head towards the 1.3000 area in the coming days.
EUR/GBP – punched below the 0.8715/20 level and below the 0.8700 area, now opening up the prospect of a move much lower towards the lows this year at 0.8415, though we should find some support at the 0.8600 area. Pullbacks need to stay below the 0.8715/20 area for further losses to unfold.
USD/JPY – having currently pushed above the 108.70 level, we look to be headed towards the 109.30 area, where we have the 200-day MA. Support comes in at the 107.50 area, as well as the lows this month at 106.50.
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