Has Johnson found a solution?

The pound rallied to a three-month high on Friday as traders started to see a real chance that the UK could leave the EU on 31st October with a deal in place. Following successful talks between the UK Prime Minister Boris Johnson and his Irish counterpart, Leo Varadkar, the UK’s Brexit Minister Stephen Barclay met with the EU’s Chief Negotiator Michel Barnier. Barnier was cautiously optimistic following the meeting advising journalists to await the outcome of this week’s EU Summit.

Rumours that Boris Johnson has conceded some ground over the Irish border issue have surfaced but so far, no details been given. Should an agreement be reached with Brussels, it must be assumed that Johnson will have canvassed MP’s to ensure that he will be able to have sufficient support for the proposals when they are put before Parliament at an extraordinary sitting of the House of Commons on Saturday following the EU Summit.

The financial markets were positioned for a further delay as it seemed impossible that talks could proceed any further following stories of Angela Merkel believing that a deal by 31st October was impossible and both Tusk and Juncker commenting that they were tired of the blame game initiated by London.

The pound has jumped 3% versus the dollar in two days its largest two-day move since the referendum and it jumped 2% on Friday alone. It reached a high of 1.2707, closing at 1.2648.

The coming week will determine if Brexit is going to happen not just on 31st October but possibly whether it will happen at all.

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Trump’s trade optimism a smokescreen?

As trade talks resume between Washington and Beijing, President Trump has confirmed that agreement has been reached over a series of issues. “Phase one” agreement covers agriculture and some intellectual property issues.

While this is a positive development, there is still a long way to go before a comprehensive trade deal between the U.S. and China can allow the global economy to return to growth and markets to breathe a sigh of relief that the feared all-out trade war has been avoided.

President Trump has hailed the progress as a success for his policy of adding tariffs to imports of Chinese goods but, in truth, neither side can claim this as a victory. The agricultural agreement probably favours China more than the U.S. However, having ordered a further withdrawal of U.S. troops in Northern Syria, Trump is under pressure from his NATO allies who universally condemn Turkish action in the region.

While the dollar has fallen as traders moved into riskier assets, the major driver for the index is contemplation of the next move by the FOMC. It remains unclear, even following Chairman Powell’s recent speech, whether another cut will take place at the next meeting at the end of the month.

Last week, the dollar index continued its recent correction, trading between 99.26 and 98.19, closing at 98.33. This week, retail sales and several regional activity surveys will be the data highlights. There are also several speeches by FOMC members which may go some way to giving an insight into the Fed’s intentions.

Market expecting further weak data

Traders have become virtually immune to poor data being seen from either the entire Eurozone or its major constituent parts. This week is unlikely to be any different as industrial production data will be released later this morning. Analysts expect a weak report but not significantly so as continuing hopes of a “bottoming out” remain.

Tomorrow the influential ZEW Institute will issue its survey of economic sentiment for both Germany and the wider region. This is also expected to have fallen with the current situation weakening from -19.9 to -25 for Germany and economic sentiment from -22.4 to -33 for the entire Eurozone.

The recent rally in the dollar has been mostly attributed to selling pressure in both the euro and Sterling given their own unique issues. However, since the market is so short of the single currency the risk for a significant move is from any sign of positivity in the data.

Last week the euro traded between 1.1062 and 1.0940 as the range narrowed and the dollar continued to correct providing a tiny measure of comfort to those looking for a rebound. The major support for the single currency is at 1.0840 with resistance at 1.1080. Unless one of those levels is broken significantly, range trading will continue.

This week, the EU Heads of Government Summit takes place with Brexit the most important, though not the only, topic of debate. With the new Presidents taking up their roles imminently there will be some discussion of new direction and issues as well as the presentation of the draft of the long-term budget plans.