Despite the renewed US-China trade war fears, European markets are rising om Friday amid a generally positive risk backdrop. Investors have mostly shrugged-off the recent US Commerce Secretary Wilbur Ross statement – on Thursday he said that the two countries are “miles and miles” away from reaching an agreement on trade. Meanwhile, in order to end the government shutdown, Trump is going to declare a national emergency along the southern border between the U.S. and Mexico. Some optimism in Europe is now due to Draghi comments on the monetary policy which will stay loose enough to support the region’s economy. As such, Britain’s FTSE 100 adds 0.15 per cent to 6,828, France’s CAC 40 gains 0.85 per cent to 4913, while German DAX 30 rallies by 1.40 per cent to 11,118. US stock index futures point to an upbeat open led by technology stocks again.
Reflecting the risk-on sentiment, the dollar gains against the Japanese yen and declines against the euro and sterling. The common currency saw a bottom below 1.13 and recovered to the 1.1350 region. On Thursday, EURUSD came under a severe selling pressure after the ‘dovish’ statements by Draghi who pointed to the rising economic risks in the region. On Friday, mixed German IFO data failed to inspire the bulls and the upside impetus remains limited for the time being. Moreover, German government revised its 2019 GDP growth forecast to just 1.0% from 1.8%. ECB’s Coeure admitted that the economic slowdown has surprised the central bank, while Vasiliauskas, another ECB official, said the ECB forecasts will likely be revised in March. All this points to the downside risks for the common currency that could challenge the key 1.13 level again in the days to come, especially if the Fed’s tone next week is not too cautious.
Earlier in the day, GBPUSD jumped to fresh November highs around 1.3840, where the pair faced offers and corrected lower. Nevertheless, the cable remains elevated due to the potential DUP backing of May’s Plan B and the receding risks of a no-deal Brexit. The current traders’ behavior shows the sterling remains an interesting buy on dip play due to improving prospects for the divorce process. The dollar so far doesn’t feel much pressure from the political crisis in the US but the longer the shutdown lasts, the more serious risks for the currency are getting. In this context, GBPUSD looks set for further gains, at least in the near future. However, the pair may yet suffer profit-taking on any negative signals from the UK government of from the EU.
Brent crude is oscillating around the $61 figure on Friday. The earlier attempts to challenge the $62 barrier failed and the prices retreated to daily lows just below $60.70. Now, Brent returned to the opening levels and struggles to find a clear direction amid the conflicting signals. On the other hand, the market is supported by the geopolitics – Trumps threatens to impose tight sanctions on the Venezuelan energy sector. The drop in Venezuelan crude oil exports to the US would be difficult to be replace and could cause diesel fuel shortages. On the other hand, crude oil inventories in the US increased last week by 7070K. As a result, the level of stockpiles in the country is now about 9% above seasonal limits. In the short-term, there are upside risks for Brent from geopolitics and risk-on sentiment in the global financial markets. Traders will also be waiting fresh Baker Hughes data to assess the drilling activity in the country – the recovery in oil rigs could exacerbate market fears of rising activity in the US shale fields and cap the upside potential in Brent.
Nathan Lambert, Head of Global FX Analytical Department