European stock markets gain on Monday as investor sentiment is supported by hopes of a breakthrough in the US-China trade dispute. The upcoming lower-level talks are reported to be aimed at easing the tensions between the two countries before Trump and Xi Jinping hold a summit in November. The talks between the trade officials set to take place in Washington through Tuesday and Wednesday. A steadying Turkish lira helped to boost market sentiment as well. However, the current investor optimism could fade quickly if the progress in trade fails to materialize this week. So far, Britain’s FTSE 100 adds 0.30 per cent to 7,580, France’s CAC 40 gains 0.58 per cent to 5,375, while German DAX 30 rises by 0.96 per cent to 12,327. US stock index futures are trading higher on Monday, with the main indexes poised to open close to new highs amid investor bullishness.
The greenback is mostly range-bound today, though the euro lags substantially as traders seem to proceed to profit-taking after two days of recovery. Despite the dollar demand is subdued due to a better risk sentiment, EURUSD failed to continue its corrective rebound and remains vulnerable to further losses. Bundesbank has published its monthly report which highlighted that Q3 German growth may be somewhat slower than 1H 2018, with weak factory orders among the key drivers for slower Q3 growth. This quite not a rosy picture has added to the negative sentiment around the single currency which is clinging to the 1.14 level after a failed attempt to challenge the 1.1450 intermediate resistance area. As such, there is still a risk of returning to the low of 1.13 after a break below the 1.1370 should the dollar demand pick up in the coming days.
GBPUSD continues to consolidate below the 1.28 level, mainly unchanged on the day. The dollar bulls are on the sidelines, but the pair fails to regain ground as Brexit woes continue to keep buyers under control. Over the weekend, the UK officials have published a report that shows that the no-deal Brexit planning will rely heavily on the availability of existing labor should the talks break down. It increases the market uncertainty and limits pound’s attractiveness even as the risk-on sentiment prevails at the start of a new trading week. The UK economy also feels the stress from the divorce process – the latest survey showed that the business confidence in the economy declined to the lowest level this year. As such, the pound’s upside potential remains rather limited in the short term, and selling on rallies is still an attractive strategy, considering a high level of uncertainty. The immediate support now comes at 1.2730.
USDJPY is trading with a mild bullish bias as the price turned positive on the day after a decline to the 110.40 area in Asia. The recovery impetus however looks limited and unsustainable, which confirms that investors remain cautious despite the upcoming US-China trade talks. There is a tough intermediate resistance for the pair on the upside as the 14-, 20- and 50-DMAs converge in the area just above the 111.00 level. This is the immediate upside target for the greenback which needs to overcome the 110.70 figure first. Amid a thin economic docket at the start of a new trading week, the US Treasury bond yields set the general tone for the dollar and a weaker tone in yields is limiting the bullish potential of the buck. However, should the trade talks disappoint investors later this week, the pair could decline further, though the 200-DMA just below the 110.00 level will likely remain intact.
Brent crude has been in a recovery mode on Monday, though the impetus is getting weaker as the price is returning to the $72 area after a failed attempt to challenge the $72.60 area. The market sentiment has improved recently as investor fears over the consequences from the global trade war have eased partially. However, it seems to be not enough to inspire bulls for a more robust correction as the risks from the trade front still persist, and the US shale companies increase inventories and production volumes again. In the short-term, Brent will likely further try to resist the downside pressure, but the price will hardly be able to stage a sustainable rebound above the $73 figure.
Nathan Lambert, Head of Global FX Analytical Department