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by Charalambos Pissouros

US-China Talks Progress “Very Good”, GBP Rallies on Brexit Deal Hopes

Equities continued to rise, while safe havens stayed under pressure yesterday, following remarks suggesting that the first day of the US-China trade talks went very well. The main gainer among the G10 currencies was the British pound, skyrocketing after Irish PM Varadkar said that a Brexit deal could be reached by the end of October, citing a positive meeting with UK PM Boris Johnson. As for today, investors may also pay some attention to Canada’s employment data for September.

Risk Appetite Remains Supported on US-China Upbeat Tone

The dollar traded lower against most of the other G10 currencies on Thursday and during the Asian morning Friday. It gained only against JPY and CHF, while it underperformed the most against GBP and SEK.

USD performance G10 currencies

Risk appetite was fueled even further yesterday, as the first day of the US-China high-level negotiations in Washington went very well. A White House official said that the talks went “probably better than expected”, while a US Chamber of Commerce official raised chances for a currency agreement to stop the yuan’s devaluation. What’s more, US President Donald Trump said, “We had a very, very good negotiation with China”, and added that he would like to meet with Chinese Vice Premier himself today.

major global stock indices

This whole optimism around the first day of the talks may have revived hopes that the week will end with an interim trade deal between the world’s two largest economies, something that could also take additional tariffs off the table. If today’s headlines continue to come in favor of such an outcome, risk assets, like equities, are likely to continue gaining, while safe havens, like the yen and the franc, could stay under selling interest. Now, if everything falls apart, something we cannot rule out as we saw it happening in the past, we will most probably have the opposite market reaction. Investors will reduce their risk exposure and seek more safety.

The positive remarks around this trade sequel may have also prompted investors to scale back a few of their bets with regards to a cut at the next FOMC meeting. Indeed, the probability for such an action has slid somewhat, but it is far from suggesting that the financial world as a whole has started having second thoughts. According to the Fed funds futures, that probability has only declined to 81% from 85% yesterday morning. We also got the US CPIs for September yesterday, but they failed to shake much expectations around the Fed’s future course of action, as both the headline and core rates remained unchanged at +1.7% yoy and +2.4% yoy respectively.

S&P 500 – Technical Outlook

In the first half of the week, the S&P 500 index drifted south, where it managed to test its key support area near the 2878 and 2882 levels. The index was also able to test the medium-term upside support line taken from the low of August 6th, from which it rebounded and made its way higher. That said, the price is approaching its other strong resistance zone, at 2960, marked by the high of October 7th. Around there, the S&P 500 could also get held by its short-term tentative downside resistance line drawn from the high of September 19th. If so, the index could drift back down and could be forming somewhat of a range, which is roughly between the aforementioned 2878 and 2960 levels. For now, we will stay neutral and wait for a break of one of our levels, before we get comfortable with any further short-term direction.

If the index struggles to overcome the aforementioned downside line and the 2960 hurdle continues to act as a strong resistance, we may see the price shifting back down again towards the support area between the 2930 and 2934 levels. Initially, the S&P 500 could stall around there, but there are no buyers in sight, a drop below that area could lead the index back to the 2907 obstacle, marked by  intraday swing low formed yesterday.

On the other hand, if the price moves above the 2960 barrier and breaks the previously-mentioned downside line, this may attract more buyers into the game and we could see the S&P 500 moving further north, possibly targeting the 2993 hurdle, marked near the highs of September 26th and October 1st. The S&P 500 could stall there for a bit, or even correct back down slightly. But if it continues to trade above that downside line, there might be more chances for the index to move higher, especially if it makes a move above the 2993 barrier. This way the price could accelerate again, as this may raise more buying interest among investors, which could help the S&P 500 to move to the 3010 level, marked by the high of September 24th.

S&P 500 cash index 4-hour chart technical analysis

Pound Skyrockets as Irish PM Sparks Hopes over a Brexit Deal

Flying from the US to the UK, the pound remained in the spotlight for another day. The British currency skyrocketed and today it was found as the main gainer, by far, among the G10s. It posted its biggest daily gain in seven months and the catalyst behind the jump was comments by Irish PM Leo Varadkar, who said that he had a very positive meeting with UK PM Boris Johnson and that a Brexit deal could be reached by the end of October.  Remember that just after Johnson offered a Brexit proposal during his closing speech at the Conservative annual conference last week, Varadkar said that the plan does not fully meet agreed objectives. Thus, his remarks yesterday may have caught GBP bears off guard, and that’s why the pound surged.

GBP performance G10 currencies

As for our view, even if the currency continues to trade higher on the back of increased expectations with regards to a Brexit deal, we are reluctant to trust a long-lasting recovery. A viable plan is yet to be found and sealed between the EU and the UK. Ireland is not the only member state that has to consent with any offered solution. Thus, we prefer to adopt a more cautious stance and wait to hear what’s the view of other EU states at next week’s EU summit, scheduled for Thursday and Friday. We still believe that a final and sealed deal is unlikely to be reached in just a week’s time, something that, at least by law, will require Johnson to ask for a new extension. However, with the UK PM sticking to its guns that Britain will exit the EU by October 31st, with or without a deal, what would happen after the EU summit remains largely a mystery.

The Swedish Krona was the second winner in line, coming under strong buying interest after Sweden’s inflation data for September beat expectations. The CPI rate ticked up to +1.5% yoy from +1.4% in August, instead of sliding to +1.3% as the forecast suggested, while the CPIF one held steady at +1.3% yoy. The forecast was for the CPIF rate to tick down to +1.2%. The core CPIF rate, which excludes the volatile items of energy, also held steady at +1.6% yoy. At its latest meeting, the Riksbank decided to keep interest rates unchanged and maintained the view that rates would be increased further towards the end of the year or the beginning of next year. Thus, the surge in the Krona suggests that market participants revived bets that officials could still push the hike button before the turn of the year.

GBP/JPY – Technical Outlook

After trading for a while below its short-term downside resistance line taken from the high of September 20th, GBP/JPY moved sharply to the upside yesterday, breaking above that downside line. The pair seems to be on its way towards the September high, at 135.74, but before it could end up there, there is a chance for a small correction, given the steep uprise. That said, we will continue monitoring the pound in general, as Brexit problems have not disappeared anywhere, despite some positive headlines from yesterday. Any negativity could pressure GBP again and bring it back down.

If we see a small push above the 134.61 barrier, this could lead the pair a bit higher to test the 135.26 hurdle, marked near an intraday swing low of September 20th, which may stall the rate for a bit. We could even see a bit of correction to the downside, but as long as GBP/JPY remains above the 134.00 zone, marked by the high of September 25th, the chances for the pair to move up again could still be high. If so, the rate may accelerate to the upside, bypass the 135.26 obstacle and aim for the highest point of September, at 135.74.

Alternatively, if the pair suddenly slides below the 133.35 hurdle, this could set the stage for a larger correction down, possibly bringing GBP/JPY to the 132.55 zone, which is the high of October 3rd. Initially, the rate might get a hold-up around there, but if the sellers are still feeling more confident, a further slide may send the pair for a test of the 131.35 level, marked near an intraday swing low formed yesterday.

GBP/JPY 4-hour chart technical analysis

As for Today’s Events

Apart from the negotiations in Washington and any headlines surrounding Brexit, investors are also likely to pay attention to Canada’s employment report for September. The unemployment rate is forecast to have remained unchanged at 5.7%, while the net change in employment is forecast to have slowed to 10k from 81.1k. At its latest meeting, the BoC kept interest rates unchanged at +1.75%, reiterating that the current degree of monetary policy stimulus remains appropriate and thereby, staying among the very few major central banks that have not turned their eyes to the cut button yet. That said, following the slowdown in both the headline and core CPIs for August, a soft employment report may raise speculation that this central bank could soon join the easing chorus.

As for the rest of Friday’s data, we get Germany’s final CPIs for September and the preliminary UoM consumer sentiment index for October. As it is usually the case, the German prints are expected to confirm their preliminary estimates, while the UoM index is forecast to have declined to 92.0 from 93.2.

As for the speakers, we have four on today’s agenda: ECB Vice President Luis De Guindos, Minneapolis Fed President Neel Kashkari, Boston Fed President Eric Rosengren and Dallas Fed President Robert Kaplan.

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