Having hit multi month lows two weeks ago markets in Europe enjoyed their second successive weekly gain last week, despite the implementation of another set of tariffs on $200bn worth of Chinese goods by the US administration, which are due to start today.

It would appear that the fact that the tariffs were set at 10% as opposed to 25% initially has tempered market concerns of a sharp deterioration in relations between Chinese and US officials after China responded fairly modestly with 5-10% tariffs on only $60bn worth of US goods in return.

While that may have more to do with the fact that China’s imports from the US are much less than the other way around it would appear that markets have taken solace in the belief that China’s response has been slightly more temperate than had originally been feared.

This rather naïve belief, that an escalation has been delayed ,looks set to be tested in the coming days after China announced at the weekend that it was pulling out from all future trade talks with the US in the wake of the recent decision to impose economic sanctions on a number of Chinese officials in response to the purchase by China of SU-35 Russian combat aircraft and SAM missile systems in the last 12 months. It also doesn’t take into account that the US could impose similar tariffs on the remaining $267bn of Chinese products that are currently excluded from the tariff round.

It would appear that Chinese officials have realised that any progress on trade is unlikely to happen before the US mid-terms are out of the way in November, an unsurprising decision given how events have played out in the last week or so.

The tone of senior US officials in the past few days, has been anything but conciliatory, not altogether surprising given the resilience of the US economy and a stock market once again at record highs. This appears to be emboldening the tough approach adopted by the US administration and has seen President Trump widening his ire towards the main oil producers, and OPEC after Brent prices briefly nudged up towards $80 a barrel last week.

This week’s focus away from the trade story is likely to be on this weeks Fed meeting which starts tomorrow and the outlook for US rates beyond this week’s likely increase in the upper bound of the Fed funds rate to 2.25%.

In light of the weekend events Europe’s markets look set to open slightly lower, against a backdrop of concerns about a slowdown in some of the latest economic indicators across Europe. Last week’s French manufacturing and services flash PMI’s showed a French economy that continues to slow, and while Germany services was ok, the manufacturing sector was disappointing.

Today’s German IFO business survey for September is expected to show a deterioration in German business sentiment from the five-month high of 103.80 that we saw in August with a slowdown to 103.20, as the deteriorating rhetoric in the face of threats of possible US tariffs on the auto sector, and the political impasse over Brexit sours the mood, amongst German businesses.

The pound had a dreadful week last week despite hitting a two-month high against the US dollar. The breakdown in relations between the UK and EU leaders in Salzburg last week, and Prime Minister Theresa May’s punchy statement on Friday could well be described as the usual political theatre that we’ve all become accustomed to in the past couple of years, however markets appear to be deciding that with the March 2019 deadline looming, the room for political manoeuvre appears to be getting smaller.

This has led to the not unreasonable conclusion that the risks of a political, as well economic dislocation have increased, particularly since both the UK government, and so-called opposition parties appear to be more concerned about their own internal squabbles, than actually doing what is best for the people they claim to represent.

With party conference season now in full swing there is likely to be little of consequence that is likely to be construed as positive for sterling, as both Labour this week, and the Conservative’s next week look to shore up their base support, with equally economically incoherent policies.

EURUSD – last week’s break above the 1.1730 level opens up the prospect of a move towards the 1.1840 area and June highs. If we break through these levels we could well see a retest of the 200-day MA at 1.1980. A move back below 1.1690 opens up the prospect of a move back towards 1.1620.

GBPUSD – last week’s failure at the 1.3300 area saw the pound drop sharply back with the prospect that we could sink back towards the 1.3000 level with the 50-day MA at 1.2990. Only a move back below 1.2980 undermines the rally off the August lows at 1.2660, and argues for a retest of these levels.

EURGBP – last Fridays fierce rally to the 0.9000 area ripped out a few stops above the 0.8940 area after rebounding off the 100-day MA at 0.8848. The 0.9040 remains a key level and as long we stay below that then a return towards the 0.8935 level could well unfold. A move through these lows re-opens a move towards 0.8840/50 area.

USDJPY – looks to be heading towards the July highs at 113.20, but looks a little overbought. That could see us drift back to the 112.00 area. A move below 111.80 opens up a return to the 111.20 area where we the main cloud support area.

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