Post date: 14/10/2019 09:55

Political events once again overshadowed economic and policy news last week in financial markets. Optimism broke out on two key fronts: Brexit negotiations and the US-China trade conflict. As a result, risk assets worldwide rallied sharply worldwide, led in currency markets by the Pound and most emerging market currencies, with the conspicuous exception of the Turkish lira, which dropped sharply after the Turkish incursion in Syria.

This week the spotlight will remain squarely on Brexit developments. The European Union Summit on Thursday and Friday provides a chance for a last-ditch deal before the October 31st deadline. However, we still expect that a postponement and a general election will be needed. There is not a lot of news in the economic calendar, with EU industrial production on Tuesday perhaps the most important data point for this week.


The apparent breakthrough in Brexit negotiations late in the week brought a surge of optimism to currency markets and sent Sterling shorts scrambling to cover. Mixed economic data (poor retail sales, better than expected monthly GDP) were largely ignored in the wake of this news. European Union sources tried to cool down expectations over the weekend, but the odds of a no-deal Brexit on October 31st have dropped to around 12% on betting markets. We remain of the view that a postponement and general election will be necessary, but merely ruling out the no-deal option warrants further upside in the Pound, closer to 1.28 on the dollar. The Bank of England meeting Thursday could provide some volatility.


Softish economic data out of Germany and France did not have any discernible impact on the common currency last week. The latter benefited from the general optimism after the apparent breakthrough in the US-Chinese talks to eke out a modest gain against the US dollar. This week, Eurozone industrial production, normally a sleepy second-tier number, could provide some volatility, particularly if it surprises to the upside and breaks the bearish mood surrounding the European economy. Aside from that, there are numerous speeches from ECB members that may shed light over the lack of consensus in the central bank regarding the latest round of policy easing.


A thoroughly mixed set of economic data last week had little impact on the US dollar. Inflation for September came out a touch softer than expected, but consumer confidence surprised to the upside. Meanwhile, the FOMC minutes for the last Fed meeting added little new information. It looks like the US dollar will continue to slowly tread water as relief over the US-China truce buoys risk assets, at least until the next Fed meeting on October 30th.