As the trade talks make apparent progress this could have significant implications for risk appetite and also the path of the dollar in the coming weeks. Yet another important week for Brexit means that once more the UK stands on the brink of leaving the EU with no deal, but will the can be kicked down the road again? We consider the outlook for forex, equities and commodities this week.
Risk appetite returned last week. Bond yields rebounded sharply as signals out of Beijing and Washington have stressed a “new consensus” for agreement. However, it is “softly, softly, catchy monkey” as according to President Trump, it could still be a number of weeks before we have a final agreement. In the meantime, markets love the prospect. With yields higher, equities have broken to six month highs, whilst higher risk forex is starting to perform much better. Could the underperformance of the euro be set to turn around? If the US/China trade dispute is resolved, maybe so. Once the dispute is put to bed, this could boost Eurozone growth expectations especially in the contracting manufacturing sectors. If so, expect the euro to be a comeback king. Until now, the dollar has broadly been seen as the best of a bad bunch, aside from sterling which is playing to an entirely different tune called “Brexit”. However, Brexit is such a fluid story now. Talks between Prime Minister May and Labour’s Corbyn brings the prospect of a softer Brexit in due course, but how long could it take? EU Council President Tusk is leaning for a “flextension” which would give the UK another 12 months to get itself sorted out. So, longer term positive, but also with the prospect of more uncertainty for a longer time. Hence why we see sterling coming under pressure again as an initial response. Although some noises of malcontent have been heard from President Macron, he is still unlikely to trigger the nuclear option of vetoing the extension in Wednesday’s EU Council meeting.
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