- Rates: To pass or not to pass?
The EU and UK agreed on a Brexit deal yesterday. Optimism soon faded however as the Northern Irish DUP reaffirmed its opposition against the agreement. Uncertainty whether the agreement will be approved by UK parliament tomorrow will probably keep investors guarded going into the weekend. The Bund might outperform Treasuries. - Currencies: Brexit vote to decide on further euro and sterling gains…
EUR/USD profited from the UK and the EU reaching a Brexit deal yesterday. Contrary to moves in other markets EUR/USD maintained gains, even after the DUP said it won’t support the deal. This suggests some underlying USD weakness. Even so, the outcome of tomorrow’s Brexit vote will decide whether EUR/USD can sustain gains beyond the 1.1110 resistance.
The Sunrise Headlines
- WS closed in the green (up to 0.40%) as sentiment was buoyed by upbeat earnings reports and benign geopolitical events. Asian markets erased prior gains after China posted weak growth numbers. China underperforms (-1.3%).
- EU and UK negotiators agreed on a draft Brexit deal, paving the way for a high-stakes vote in the British Parliament. Boris Johnson now faces the challenge to persuade his new deal to sceptical members of the Parliament.
- China’s economy expanded at its slowest pace in over 30 years as lacklustre domestic demand and the ongoing downturn in global trade took a toll. Third quarter GDP rose 6% from a year earlier, missing the 6.1% consensus.
- The Fed’s Williams said on Thursday that the central bank is learning as it works to increase liquidity in the banking system and that it will adjust its response to money market volatility as needed.
- Japan’s core CPI fell to 0.3% in September, a near two-and-a-half year low, dragged down by sliding energy prices, which could increase pressure on the BoJ to further ease monetary policy and/or deploy fiscal stimulus.
- The US and Turkey agreed to a 120-hour cease-fire in Syria to allow Kurdish fighters to withdraw. Trump won’t impose fresh sanctions on Turkey, and once a permanent cease-fire takes effect, earlier announced penalties will be dropped.
- In today’s economic calendar the Brexit saga takes the centre stage. Markets will gauge whether Boris Johnson will be able to sell the deal to Parliament. The Fed’s George and Clarida are due to speak.
Currencies: Brexit Vote To Decide On Further Euro And Sterling Gains…
Brexit vote to decide on next sterling & euro move
Brexit was the driver for global trading yesterday. The euro was a prominent beneficiary. Headlines on an EU-UK deal propelled EUR/USD beyond 1.11. Other markets mostly reversed part of the initial risk-on reaction after the DUP said it won’t support the deal, but EUR/USD quite easily maintained most of the initial gain. This suggests some USD weakness, too. In this respect, US retail sales printed soft, supporting calls for further Fed easing. EUR/USD closed at 1.1125 (from 1.1072). USD/JPY drifted back lower in the 108 big figure to close at 108.66.
Overnight, Asian equities mostly show modest losses with Japan and India slightly outperforming. China Q3 growth cooled as expected (6.0% Y/Y) but September production was better than expected. USD/CNY is trading little changed (7.0775 area). Japan headline inflation dropped to 0.2% Y/Y. The yen temporarily lost a few ticks, but USD/JPY returned to the 108.60 area. EUR/USD is holding stable in the 1.1125 area.
Today, there are no important eco data in the US or the EMU. Markets will be flooded with analysis on the arithmetic of the Brexit vote in the UK Parliament planned for Saturday. It is unlikely that the outcome will be clear before the vote will take place. This leaves (FX) markets in a limbo. Several Fed members (Kaplan, George, Clarida) will speak, but probably won’t change expectations of an October rate cut in a profound way anymore. So, we expect order-driven trade, maybe with a slight risk-off bias. Looking at yesterday’s price action, such a cautious risk-off might weigh more on USD/JPY than on EUR/USD.
Last week, EUR/USD regained 1.10, but with no follow-through gains. However, US retail sales and new hopes on a Brexit deal supported further EUR/USD gains. A Brexit agreement would remove a high-profile source of E(M)U uncertainty. Maybe, the dollar might lose some further momentum ahead of the Oct 30 Fed meeting. The Brexit vote probably will decide whether gains can be extended beyond 1.1110 resistance.
Sterling was haunted by the developing Brexit story yesterday. EUR/GBP spiked below 0.86 on the announcement of a deal, just to reverse the sterling gain after the DUP said it won’t support the deal. EUR/GBP closed the day little changed at 0.8629. The countdown to tomorrow’s Brexit might paralyse trading today. After recent positive positioning, a negative outcome of the vote might affect sterling more than a positive one, even as the reaction in both scenarios might be significant.
EUR/USD maintains gain despite Brexit uncertainty
