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Optimism over US-China trade talks

Friday was a bullish end to a very volatile week. 

The report that China and the US will meet to discuss trade today and tomorrow lifted sentiment. There was a feeling that the very announcement of discussions was a positive step, and the sense of optimism spread around the world. The power dynamic has changed too, the US stock market is far from reaching record highs, so President Trump might be willing to adopt a more open approach. Stock markets in Asia ticked up overnight as dealers are optimistic about the US-China trade talks.

The Chinese government lowered the reserve requirement ratio on Friday, in an effort to encourage lending. Tax cuts are in the pipeline too. The moves are aimed at turning around the slowing economy. Lately, attempts to reinvigorate the economy have failed. The Caixin manufacturing PMI survey showed growth on the month, and that counteracted the poor manufacturing update earlier in the week.  

The US revealed an impressive non-farm payrolls report at the back end of the last week. 312,000 jobs were added in December, and the November report was revised higher to 176,000, up from 155,000. The unemployment rate edged up to 3.9%, from 3.7%. Average earnings on a yearly basis, were 3.2%, which was an improvement on November’s 3.1%. The strong earnings component bodes particularly well for the US economy, as workers who earn more, often spend more.

We heard from Jerome Powell, the head of the Federal Reserve on Friday too. Mr Powell said the US central bank will be ‘patient’ and ‘flexible’ when it comes to monetary policy. Dealers took that as a sign the Fed will be take a less hawkish position in 2019, and that added to the bullish move.

It wasn’t all positive on Friday, the German services PMI report fell to 51.8 – its lowest reading since late 2016. The French services sector contracted, and it was the weakest reading since early 2015. The largest industries of the two largest economies in the currency bloc are in decline, and that is likely to hang over the euro.   

209 MPs called on Mrs May to avoid a ‘no-deal Brexit’. Lawmakers from various different parties expressed concern about the possibility of leaving the EU without a deal. The vote in parliament is likely to be next week and Prime Minister urged MPs to back her deal, otherwise the UK would be in ‘unchartered territory’.

German industrial orders and retail sales will be announced at 7am (UK time) and traders are expecting -0.4% and 0.3% respectively.  

At 3pm (US time) the US will announce the ISM non-manufacturing PMI report, and the consensus estimate is 59.7, which would be a decline from 60.7 in November.

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1215 area to be retested. A move to the upside could run into resistance in the 1.1510/00 area.

GBP/USD – has fallen back into its wider downward trend that has been in place since September, and support might come into play at 1.2476. A rally might run into resistance at 1.2815.   

EUR/GBP – has been broadly moving higher since mid-November, and if the positive move continues it might target 0.9100. A pullback might find support at 0.8900 – 100-day moving average.  

USD/JPY – has been edging lower since October, and if the negative move continues, support might be found at 104.63. A bounce back might run into resistance at 111.08 – 200-day moving average.


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