European as well as US equity markets finished higher yesterday on the back of the comments from President Trump that Washington DC and Beijing were ‘very close’ to a ‘big deal’. 

Halfway into the US trading session it was reported the US and China have agreed in principal to phase one of the trade deal, and it is waiting the sign-off from President Trump. Which might mean the US will not impose tariffs on roughly $150 billion worth of Chinese imports. There was also talk the Trump administration offered to reduce the existing tariffs by up to 50% on the $360 billion worth of Chinese imports. The offer apparently comes with a warning, that the levies will be raised again should China break the terms of the deal. The Dow Jones plus the S&P 500 hit new record highs on the back of the news. Stocks in Asia gained ground overnight on the back of the US-China trade hopes.   

Conservatives win a majority

Sterling was jolted higher by the UK general election exit poll which predicted a massive majority for the Conservative party. The Tories have now won a majority, but many constituencies have yet to declare their results, and it is looking likely that Mr Johnson will expand his majority. The stellar gains made by the pound reflect the fact the Conservative party are pro-business, and Boris Johnson already has an exit deal agreed with Brussels. Admittedly, sterling hasn’t moved a whole lot since the announcement of the exit poll at 10pm yesterday, but this could be the beginning of a wider rally in the pound. 

ECB keep rates on hold

Yesterday the European Central Bank (ECB) kept interest rates on hold, meeting forecasts. The central bank altered its inflation plus growth outlooks slightly. The 2019 GDP forecast was upped to 1.2% from 1.1%, but the 2020 outlook was lowered to 1.1% from 1.2%. This year’s CPI forecast was kept at 1.2%, and the 2020 one was edged up to 1.1%, but the 2021 forecast was trimmed to 1.4% from 1.5%. Keep in mind, the ECB are aiming to get the CPI rate close to 2%, so it looks as if that target won’t be hit in the next few years, so the central bank are likely to keep monetary policy loose for some time.

The headline PPI rate in the US held steady at 1.1%, which was shy of the 1.2% forecast. The core reading dropped by 0.3% to 1.3%, and keep in mind the consensus estimate was 1.6%. The jobless claims rate jumped to 252,000 from 213,000 – this is a little worrying, but the latest non-farm payrolls report was very impressive.

The US dollar index recouped a lot of the ground that it lost on Wednesday. The weakness in the pound on account of the UK general election jitters, and the middle-of-the road update from the ECB helped the greenback. The push higher in the dollar was all the more impressive in light of the disappointing economic updates. The rebound in the dollar hurt gold, and so did the rally in stocks – traders dumped the metal as the risk-on sentiment took hold.

At 1.30 (UK time), the US will release the latest retail sales report. Economists are expecting a reading of 0.5%, which would be an increase on the 0.3% posted in October. The report that strips out auto sales is tipped to be 0.4%.    

FX snapshot

EUR/USD – has been pushing higher since late November and while it holds above the 100-day moving average at 1.1064, it might retest 1.1179. A move to the downside might target the 1.1000 area. 

GBP/USD – has been in a bullish trend since early September and if the positive run continues it might target 1.3600. A pullback might find support at 1.3361 or 1.3200.

EUR/GBP – recently fell to a level last seen in July 2016, and if the bearish move continues it might target 0.8200. A rebound in the currency pair might target the 0.8600 area.

USD/JPY – while it holds above the 50-day moving average at 108.64 it could target 110.00. A move back below the 50-day moving average might bring 107.88 into play.     

 

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