Global Themes

US-China trade talks boosting sentiment
- EUR/USD testing multi-month highs
- GBP/USD over five cents below 2018 average
- GBP/EUR subdued atop €1.11

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EUR/USD testing multi-month highs
The US Dollar remains slightly softer amidst renewed risk-on trading thanks to optimism about US-China trade relations. Downward pressure has also sustained since Federal Reserve (Fed) Chair Jerome Powell’s dovish tone last week.

The dollar, as a high-yielding safe-haven currency, tends to appreciate in times of global uncertainty as witnessed last week. These positions unwind as risk aversion subsides, consequently weakening the US currency.

After outperforming currency rivals in 2018 thanks to four rate hikes by the US Federal Reserve (Fed), analysts speculate this year could see a pause in hikes and perhaps even a rate cut if growth conditions falter. Currently, Fed fund futures price a 67.2% probability of US interest rates remaining unchanged this year (source: CME Group).

The Euro stamped its highest close since late October against the dollar, having bounced off the 2-month support level at $1.13. As EUR/USD approaches the upper limit of its recent 3-cent trading range, a break of $1.15 could spark a boost in momentum for the common currency. This is an obvious medium-term ceiling though and already the currency pair has reversed course.


GBP/USD over five cents below 2018 average
Ongoing rumours that UK officials are discussing the possibility of extending Article 50 are hoisting the British Pound higher, though GBP/USD remains well below the 2018 average of $1.3348.

After triggering Article 50 back in March 2017, the 2-year time line to exit the bloc is fast approaching. Both UK and European Union (EU) officials could extend this deadline if Prime Minister Theresa May loses the meaningful parliamentary vote on her Brexit deal next week. Nevertheless, looming Brexit jitters aren’t deterring the pound from scaling higher against currency peers as GBP/USD could potentially tackle the $1.28 threshold soon.

The currency pair managed to close out yesterday above the 50-day moving average at $1.2773, which was proving a key level of resistance over this month. This could be a signal of a sustained change in sentiment for the GBP/USD cross and upward momentum could build.

There is a lack of clear directional guidance though as Brexit uncertainty persists. Despite the recent positive bias for Sterling, it is still priced well below the average rates of 2018 against currency rivals including the Euro (1.5-cents lower) and the US Dollar (over 5-cents lower).


GBP/EUR subdued atop €1.11
Lacklustre economic growth figures from the Eurozone have weighed on the Euro in recent months, but the single currency is gaining some traction to the upside, keeping a lid on GBP/EUR gains.

Last month’s Eurozone Q3 GDP data revealed the economy grew just 0.2% in the three months to September 2018 q/q. It was the weakest growth rate since Q2 2014. However, a surprise uplift in retail sales yesterday boosted demand for the Euro, causing GBP/EUR to fall. Apart from January 2018, GBP/EUR has closed each month since below the €1.14 level but above €1.11. This highlights the narrow trading range and lack of trend conviction amid the conflicting Brexit-related news and economic indicators from both the UK and the Euro area.

Already this morning, German industrial output for November surprised to the downside, which will likely limit demand for the Euro today. At 10:00am, Eurozone sentiment surveys for December will also be released and are expected weaker, which again may soften Euro demand and allow GBP/EUR to re-test the €1.12 barrier.

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