Sterling Recovers Broadly But Risks Stay on the Downside, Dollar Losing Some Steam

Market overviews

Sterling pares back some of last week’s loss and is trading as the strongest one for today so far. There were lot of comments on Brexit from both sides. In particular, UK Brexit Minister Dominic Raab tried to talk down the disagreement from EU. But the messages from the EU seemed to be rather consistent so far as they’re not going to drop their demand. We’ll know more on UK’s side after Prime Minister Theresa May’s cabinet meeting today. In the mean time, Euro follows as the second strongest for the day, Dollar the third. Australian and New Zealand Dollar are the weakest ones as China is clear they won’t back down from trade war with the US.

Quick update: Euro surges sharply as ECB Draghi said domestic price pressures are strengthening and broadening. More here.

In other markets, European stocks trade generally lower today. FTSE is down -0.22% at the time of writing, DAX down -0.31%, CAC down -0.19%. Germany 10 year bund yield breached 0.48 earlier but is back at 0.468. China and Japan are on holiday. Hong Kong HSI closed down -1.62%, Singapore Strait Times closed up 0.05%.

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Technically, Dollar did try to strength earlier today but there is no follow through buying. Focus remains on whether it could reversal after hitting key fibonacci level at Euro at 1.1779. Risks stay on the downside for Sterling despite today’s recovery. We’d still more likely seen GBP/USD breaks through 1.3042 support ahead.

UK Raab: Stubborn tone of EU just blips blown a little out of proportion

UK Brexit Minister Dominic Rob said today “we keep on negotiating in good faith, we try and get the best deal we can, but we are ready for all eventualities.” He also urged not to overreact to the “stubborn” tone of the EU. He emphasized “these blips in the world, they’re blown a little bit out of proportion, but we double down, we don’t throw our toys out the pram, hold our nerve, keep our cool.”

However, Rob also pointed out “at the same we need to be ready for the possibility … that the ambitions that we are bringing to these negotiations to try and get a win-win deal isn’t matched by the other side and it does take two to tango.”

He added “what they need to see is some unity of purpose from the UK which is why all this Labour nonsense about a second referendum is not only undemocratic but it’s the last thing we should be doing right now with our EU partners because it encourages them to offer us a lousy deal which makes a no deal more likely.”  Raab also said “the vast majority, the silent majority in this country just want us to get on with it and that’s what we’re doing.”

More comments on Brexit as PM May’s cabinet meets

German European affairs minister Michael Roth said Brexit deal is still possible by November. And he also warned that a no-deal Brexit would be the worst case scenario for all parties. However, Roth also emphasized that “we will not undo the single market or create special rules which could result in competitive disadvantages for our companies.” Also, he added that Germany fully support chief negotiator Michel Barnier. There is no softening on Germany’s stance indeed.

Separately, French President Emmanuel Macron’s office also said he expected the UK to put forward new proposals in October. And he preferred not to drag on. His office said that “It’s a way of raising pressure, … It’s not necessarily ‘take it or leave it’, it’s really to say there’s a lot of work to be done by November, we must do it, and not let this thing drag on.”

UK Prime Minister Theresa May’s spokesman said the cabinet is due to discuss Brexit negotiations today. And he emphasized “the cabinet gave its full support to the white paper (Chequers plan), and that continues to be the case.”

However, Jacob Rees-Mogg, chairman of the European Research Group of anti-EU lawmakers in May’s ruling Conservative party, said “the prime minister is a lady of singular wisdom and therefore is likely to recognize the reality that Chequers does not have much support either in this country or abroad.”

German Ifo dropped to 103.7, economy remains robust

German Ifo Business Climate Index dropped -0.1 to 103.7 in September but beat expectation of 103.2. Business Expectations index dropped -0.2 to 101.0, above consensus of 100.5. But Current Assessment Index was unchanged at 106.4, above expectation of 106.0.

Ifo President Clemens Fuest noted in the release “firms’ assessments of their current business situation deteriorated marginally, but remain at a high level. Companies also scaled back their business expectations somewhat. Despite growing uncertainty, the German economy remains robust.”

China released 36k-word white paper showing it’s not backing down on trade war with US

China’s State Council release a “White Paper on China-US Economic and Trade Frictions and China’s Position” today. This 36000 words paper consists of six sections, detailing the benefits of the bilateral trade, the economic and trade relations, US protectionism and trade hegemonism, the threat of US practice to world economy and China’s own position. It doesn’t matter how much truth the white paper tells, as what China says is always doubtful. Most important thing is that China is not going to back down from trade war with the US.

In particular, the paper condemns the under the “America First” bandwagon, the new US government “abandoned the basic norms of international exchanges such as mutual respect and equal consultation, and implemented unilateralism, protectionism and economic hegemonism.”And the US used different means to “carry out economic intimidation, and impose extreme pressure its own interests impose its own interests on China.” The paper also detailed the new protectionist measures of the US. These include measures that discriminate products of other countries, abused national security investigations, subsidies on local industries.

China’s own position include defending the “dignity and core interests of the country”, “promote healthy trade relationship with the US”, “promote and improve multilateral trade system”, “protect property and intellectual property rights”, “protect rights of foreign businesses in China”, “continue deepening reforms on opening the markets”, work on win-win relationships with developed and developing countries”, etc.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.2999; (P) 1.3138; (R1) 1.3221; More…

Intraday bias in GBP/USD is turned neutral first with today’s strong recovery. But still, risks stay on the downside as long as 1.3297 resistance holds. The corrective rise from 1.2661 could have completed at 1.3297, ahead of 1.3316 key fibonacci level. On the downside, break of 1.3042 resistance turned support will bring deeper fall to 1.2784. Break there will argue that larger down trend from 1.4376 is resuming for a new low below 1.2661.

In the bigger picture, whole medium term rebound from 1.1946 (2016 low) should have completed at 1.4376 already, after rejection from 55 month EMA (now at 1.4062). The structure and momentum of the fall from 1.4376 argues that it’s resuming long term down trend. And this will be the preferred case as long as 38.2% retracement of 1.4376 to 1.2661 at 1.3316 holds. However, firm break of 1.3316 would bring stronger rebound to 61.8% retracement at 1.3721. And, the eventual depth of the fall from 1.4376, and the chance of hitting 1.1946 low, will depend on the strength of the interim corrective rebound from 1.2661.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
08:00 EUR German IFO Business Climate Sep 103.7 103.2 103.8
08:00 EUR German IFO Expectations Sep 101 100.5 101.2
08:00 EUR German IFO Current Assessment Sep 106.4 106 106.4
10:00 GBP CBI Trends Total Orders Sep -1 5 7
12:30 CAD Wholesale Trade Sales M/M Jul 1.50% 0.40% -0.80% -0.90%