European Update – Trade Deal, BoE, UK, Gold, Oil

Investors Await Trade Deal Terms

After a wild start to the year, everything is starting to settle down again in the markets with investors this week eyeing a long-awaited signing ceremony in Washington.

Source – Thomson Reuters Eikon

Vice Premier Liu He is making the trip to the US to officially wrap up months of negotiations and put signature to the agreement. While this isn’t the comprehensive deal we were promised and that Trump so desperately wanted, it does remove some of the trade uncertainty and tariffs, and marks the first major de-escalation in the trade war.

The deal itself has been kept well under wraps, with only a few details of it being publicly known. We’re expecting to learn a lot more this week, after which investors can properly respond to just how significant this is. The worry being, of course, that phase one is an acknowledgement that anything more comprehensive is far more difficult or achievable and that it was in both sides interest just to get something over the line before the US election.

Still, a deal is a deal and it leaves us in a better place than we would have been had there not been one and more tariffs imposed in December. We’ve already had that bounce in the markets though and for that to be bettered, there’ll need to be a few surprises on Wednesday. Otherwise we’re going to need to rely on the economy and that hasn’t been giving us an awful lot of good news recently.

Sterling slips as BoE rate cut becomes increasingly likely

Sterling is slipping this morning after another batch of disappointing UK data raised the prospects of a Bank of England rate cut. The central bank has been on hold for some time but the removal of some Brexit uncertainty will allow it to return to business as normal, ish.  Policy makers are planting the seeds for an upcoming rate cut, with Gertjan Vlieghe joining those warning of a cut if data doesn’t improve.

It’s not surprising then that a batch of weak figures for everything from manufacturing to services and GDP hasn’t gone down too well. Granted, taking a measure of the UK economy in November is like going to the Doctors for a health check on 1 January, but these weak numbers are hardly a one-off. The pound has continued to dip, breaking back below 1.30 temporarily and looking under pressure.

GBPUSD Daily Chart

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Safe haven demand softens

Gold volatility is softening a little and price has stabilized around $1,540-1,560. This comes after a surge in demand amid a shift in risk appetite as tensions flared between the US and Iran. While tensions between the Iranian regime and other countries are still heightened, following the accidental downing of a passenger aircraft in Iran, the risks of further attacks on either side are much smaller than they were a week ago. Still, gold will remain vulnerable to spikes but could trend lower in the interim, with a break of $1,540 potentially triggering a move back towards $1,520.

Gold Daily Chart

Oil settles after bumper couple of weeks

Oil has had a lively start to the year, for obvious reasons. The events of the last week may reduce the risk of a large scale escalation on the Iranian side but the Strait of Hormuz could still be targeted, as we saw at times last year. This may keep oil prices elevated at times but they have settled for now, with Brent stable around $65 and WTI at $60. Like gold, oil will be vulnerable to spikes but as the dust settles, could trend lower in the interim.

Brent Daily Chart

Economic Calendar

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