European markets are trading higher on Monday amid investor optimism ahead of another round of trade talks between the US and China this week. It looks like markets have digested the reports that Trump won’t be meeting with Xi before the trade deal deadline of March 1. Investors are now focused on trade developments and seem to be ignoring further signs of economic weakness in Europe. Today’s official data revealed that the UK GDP grew at its slowest pace since 2012 last year. The country’s economy rose just 0.2% in the final three months of 2018 from 0.6% in the previous quarter. Brexit talks also begin today. There are reasons for concerns on this front as well, so the current market optimism may well abate during the trading later. So far, Britain’s FTSE 100 sheds 0.67 per cent to 7,118, France’s CAC 40 is up 0.89% to 5,005, while German DAX 30 rises by 0.87 per cent to 11,001. US stock index futures point to a higher open, also amid rising hopes of striking a deal between the US and China to prevent further tariff war.
Despite some overbought conditions, the dollar rallies further on Monday after a fruitful week. The USD demand is mainly due to its safe-haven and reserve status as investors remain cautious despite the current optimism. Another source of dollar strength is the weakening European economy that further sends bearish signals and thus pushes back expectations of the first ECB rate hike this year. Italy’s economy slipped into a technical recession late last year and still has major budget issues. By the way, Italy’s deputy prime minister Salvini said that the idea to use gold reserves to plug budget holes could be interesting. As such, the government may use a part of the country’s gold reserves to avoid a budget correction this year and a VAT increase next year. EURUSD fell below 1.13 for the first time in two weeks, and the downside momentum remains intact as the price failed to break above the 1.1320-30 region earlier. As the pair has been eroding the bids around the psychologically important level, the next line of defense comes at 1.290 and then at 1.1270.
The pound keeps bleeding as well, testing the 100-DMA marginally below the 1.29 handle. The selling pressure increased after a dismal GDP report. As UK trade secretary Liam Fox mentioned, Brexit is not the only factor in GDP slowdown and China is also affecting global growth. Anyway, Brexit uncertainty made total business investment in the UK decline in all four quarters in 2018. Interestingly, the last time business investment saw such a negative trend was back in the early 1990’s. Meanwhile, a UK government spokesman said that a meaningful vote on Brexit won’t be this week and May will make a statement to parliament on Tuesday. The official also added that the government is committed to bring vote on Brexit deal as soon as possible. So the pound will remain vulnerable in the days to come, especially as the greenback remains on the offensive. Technically, a confirmation of a break below 1.29 is needed for a slide towards last week’s lows around 1.2850. Once below, the price will target 1.2815.
Brent crude is making some recovery attempts after a dip to low of $61.34 earlier in the day. Market participants remain nervous, and the price dynamics is still unstable as a number of various factors are driving the market now. US-China trade fears are capping the upside potential and Brent is unlikely to see a strong recovery any time soon as traders will refrain from actions ahead of new trade talks. The two countries are to strike a deal before March 1. Otherwise, the world will face another escalation of a trade war – Washington will increase tariffs on Chinese imports from 10% to 25%, and Beijing has already said that it will retaliate. Such a scenario will lead to even stronger concerns over the global oil demand, especially against the backdrop of rising activity in the US shale industry.
Nathan Lambert, Head of Global FX Analytical Department