Global markets are on the rise on Friday, with European stocks are on track for the best week since 2016. Investor optimism is due to raised hopes of a US-China trade agreement after the US President Trump said that trade discussions with Beijing are moving along nicely. Some progress in talks is cheered by global investors ahead of the G-20 Summit later this month. According to latest reports, Trump wants to reach an agreement on trade with Xi at the upcoming summit. The current bounce in risk trades, however, could quickly fizzle as soon as investors realize that coming to a peaceful solution won’t be so easy. So far, Britain’s FTSE 100 adds 0.86 per cent to 7,176, France’s CAC 40 rises by 1.44 per cent to 5,159, while German DAX 30 gains 1.63 per cent to 11,655. US stock index futures are rising along with global markets cheering a potential progress in US-China trade talks.
The greenback is under a widespread pressure as safe-haven demand has substantially abated on fresh hopes of avoiding further escalation of a trade war between the US and China. After a fruitful October, USD index started the new month on a weaker footing, mainly due to a better risk appetite. Another source of dollar weakness is the aggressive rebound in European currencies on signs of progress on Brexit. But the current euphoria over the deal between London and the EU looks overdone at this stage as the two sides are yet to resolve some major issues including the Irish border. Today, positive economic data reinforced the bullish tone around sterling. The UK October construction PMI best estimates with 53.2 vs. 52.0 expected. GBPUSD is changing hands above 1.30 after a recent jump to fresh one-week high of 1.3040. The next upside target comes at 1.3075 as a break above will open the way to 1.31. In the short-term, there is a risk of a partial correction amid some profit-taking.
EURUSD keeps the bullish tone as well. The pair extended gains to the 1.1450 region and looks set for further ascent due to dollar weakness. The recovery could really extend towards 1.15 should USD selling continue in the short term. Otherwise, the buying pressure could ease. Interestingly, the weak euro area economic reports failed to discourage euro bulls - both German and euro area manufacturing PMIs came in lower than expected, but traders shrugged off further negative signals from the region, which confirms that risk trades are driving the markets for now. So should the risk sentiment stay elevated these days, the pair could further regain its previous losses. However, we shouldn’t forget about the diverging monetary policy in the euro zone and the US. In this context, the dollar still looks more attractive as the European economic signals don’t argue for proceeding to rate hikes by the ECB.
USDJPY is making some recovery attempts after two days of declines but the impetus looks limited due to the general defensive tone around the greenback. The pair tried to challenge the 113.00 barrier but was rejected, though stays green in the daily charts. This week was quite volatile for USDJPY in general, and the price has risen substantially despite the occasional selling waves. The immediate upside risk for the pair now comes from risk trades prevailing in the global financial markets. Technically, the price needs to regain the 113.00 handle in order to target this week’s highs in the 113.40 region. On the downside, 112.55 is the key short-term support.
Brent crude challenged the $72.50 area earlier in the day and has settled around the $73 level, struggling to attract demand after the recent sell-off. The increasing crude oil production globally drives the prices down as fears over supply deficit continue to abate. In October, OPEC production increased to the highest level in over two years, while output in the US reached a new record high. Later today, Baker Hughes will publish its weekly report and should the number of oil rigs show growth, the downside pressure on Brent could increase.
Nathan Lambert, Head of Global FX Analytical Department