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Long-term review

Exchange Rates 11.10.2019 analysis

This week, the currency market shows increased volatility. One of its main drivers remains the news about trade negotiations between the United States and China.

On Wednesday evening, investors feared that the Chinese delegation might leave the United States after the first day of talks, and even on Thursday morning, no one could say how they would go.

The head of the US Department of the Treasury, Stephen Mnuchin, and sales representative Robert Lighthizer spoke for more than seven hours with Chinese Vice Premier Liu He and other high-ranking Chinese officials. Today, the dialogue will continue.

"The first day of the thirteenth round of trade talks between Washington and Beijing ended on an optimistic note," Reuters reports.

"We just completed today's talks with China. Everything is very good with us and tomorrow we will continue. I meet with the Deputy Prime Minister at the White House. And I think that everything is going very well," US President Donald Trump wrote on Twitter the day before. However, in the same post, he noted: "They want to make a deal, but do I want this?"

Thus, the outcome of the next round of trade negotiations is still not known and may bring new surprises today. If D. Trump goes to the conclusion of a partial deal with China, the USD/JPY pair will jump to monthly highs of 108.50. Other leading currencies will also be able to benefit from the demand for risk. At the same time, the EUR/USD pair will test the level of 1.1050, and AUD/USD will go to the level of 0.6850. If the negotiations fail, the market will quickly lose all Thursday's profits, and the main blow will fall on the pair USD/JPY and AUD/USD.

The conclusion of a trade transaction will also reduce the likelihood of further easing of the monetary policy of the Federal Reserve. Core inflation in the US has slowed, reinforcing expectations for the Fed's third rate cut this year (in October). Zero consumer price growth in September was the weakest since January. However, this week, macroeconomic statistics from the United States have little impact on the greenback, as global growth prospects depend on trade negotiations.

Hopes that Washington and Beijing can conclude an interim trade agreement, as well as talk that ECB President Mario Draghi almost single-handedly decided to launch QE, allowed the EUR/USD pair to rise above the base of the 10th figure.

As the minutes of the September meeting of the ECB Governing Council showed yesterday, some of its members considered the arguments for resuming asset purchases was not strong enough, as they viewed the measure as a tool of last resort that should only be used in the event of more serious contingencies and which was not justified in the light of the current outlook. At the same time, some officials opposed reducing the deposit rate from -0.4% to -0.5%, focusing on side effects.

The de-escalation of the trade conflict between the US and China, as well as the split in the ranks of the ECB, allow the EUR/USD bulls to hope for a continuation of the rally in case of a successful assault on the resistance level of 1.1035 – 1.1045. However, problems in the European region limit the pair's opportunities for growth. Thus, in August, German exports fell to -1.8%, and industrial production in France fell to -0.9%. All these indicators came out below forecasts.

Meanwhile, the GBP/USD pair has updated three-month highs, rising above 1.26, amid reports that the United Kingdom and the European Union are nearing a Brexit deal.

Exchange Rates 11.10.2019 analysis

Yesterday, British Prime Minister Boris Johnson held talks with his Irish counterpart Leo Varadkar and discussed controversial customs issues in the context of the upcoming exit of Albion from the EU. The joint statement, formed as a result of the dialogue, said the leaders believe a path is possible that will lead Britain and the EU to an agreement.

"This sharp rebound indicates the continued presence of a large number of speculative short positions in the pound, which were shrinking by the time the trading session ended in London. There were few details in the joint statement, but it reinforced expectations that there would be an extension of the UK's exit from the EU at the end of this month. However, the risks of holding new parliamentary elections in the country still exist, so the growth potential of the pound is limited," strategists at Union Bancaire Privee believe.

European leaders at the summit to be held next week must determine whether an agreement will be reached with the UK, whether a deferment will be granted, or if the parties are heading for a "tough" Brexit, which, according to some analysts, will depreciate the pound by 10%.

"The deadline for Foggy Albion to leave the EU, which is set for October 31, is likely to be postponed to a later time," Julius Baer believes.

"After agreeing on a new postponement, the British opposition will decide on a vote of no confidence in the Prime Minister, followed by a general election. Even if the conservatives win this election, they are unlikely to win a parliamentary majority to implement the "hard" scenario. Therefore, the Brexit agreement is the only possible way for the United Kingdom to leave the EU," they added.

Recall that in early September, the British Parliament passed a law that establishes a ban on the UK leaving the EU without a deal. According to the document, the agreement must be signed by October 19 so that the country can leave the Alliance on October 31.

"Earlier, B. Johnson repeatedly said that Britain will leave the EU before the end of October. To fulfill this promise, the Prime Minister needs to hurry," Julius Baer noted.

Performed by Viktor Isakov,
Analytical expert
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