The Chinese government took the wind out of the bull’s sails yesterday as it was reported that Beijing are pessimistic about the prospect of a trade deal as President Trump doesn’t want to roll back on tariffs. 

The news applied some pressure to European equity markets, while US indices finished fractional higher. The update encouraged some dealers to reduce their exposure to stocks.

The trade war has dragged on for over one year so to a certain extent traders are used to minor setbacks. The announcement from the Chinese side didn’t send traders running, but equities largely lost a little ground.

In the middle of next month, the Trump Administration will introduce fresh tariffs on roughly $156 billion worth of Chinese imports, unless something changes. Some traders are hoping phase one of the overall trade deal will be agreed upon by then so there will be no need to press ahead with new tariffs. Mr Trump would like more concessions from China in relation to intellectual property rights, but for now he doesn’t want to reverse tariffs, but China are open to the idea of rolling back on the levies. The toing and froing of the trade spat will probably continue up until when the next round of US levies are set to kick in, and then we could see some constructive talks.

Trade concerns played out in Asia overnight as the major indices were mixed and the trading ranges was relatively small.

Yesterday the Peoples Bank of China trimmed the repo rate by five basis points. It was the first cut since 2015, and admittedly it wasn’t a deep cut, but it was important from a political point of view. It is hardly surprising the Chinese authorities altered monetary policy at a time when it is locked in trade dispute with the US. It was Beijing’s way of letting the US know they can fend them off in the trade battle with one hand, while tweaking monetary policy with the other.   

In recent weeks the pound has performed well as the Conservative Party are leading in the polls. On Monday, Prime Minister Johnson declared that all the Tory candidates contesting next month’s general election have promised to back the deal he brokered with the EU. Traders are cautiously optimistic when it comes to sterling as the Tories are doing well in the opinion polls, but the last few years have shown us not to trust opinion polls too much.

Oil lost ground yesterday on the back of the fresh concerns about the US-China trade situation. The energy market often gets a modest lift when Beijing and Washington DC’s relationship is on a strong footing, but tends to come under major pressure when talks hit a bump in the road, which suggests the underlying sentiment is weak.    

The slight trade wobble from China encouraged traders to pour their funds into assets like the Japanese yen as well as gold – the classic safe haven plays. The push higher in gold wasn’t major but some traders considered it to be relatively cheap as it slipped to a three month low last week.    

At 11am (UK time) the CBI industrial order expectations report will be published and economists are expecting an improvement to -30 from -37.

US housing data will be posted at 1.30pm (UK time). The building permits report is tipped to be 1.38 million, which would be a drop from the 1.39 million in September. Housing starts are expected to come in at 1.32 million, and keep in mind the previous repot was 1.25 million.       

EUR/USD – has been broadly moving higher for over one month and while it holds above the 50-day moving average at 1.1041, it might seek to retest 1.1100 area. A drop back below 1.1041 could mean the currency is going to fall back into the wider negative trend, which could see the market target 1.0879. 

GBP/USD – remains in the recent upward trend and a sizeable break above the 1.3000 area might bring 1.3178 into play. A move lower might put the 200-day moving average at 1.2702 on the radar.           

EUR/GBP – is still in the bearish trend so 0.8471 might be targeted. A break above 08760 might bring the 50-day moving average at 0.8750 into play.   

USD/JPY – while it holds above the 50-day moving average at 108.21 it could target 110.00. A move back below the 50-day moving average might bring 106.48 into play.     

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